TOKYO (REUTERS) – Japan’s factory output shrank for the third straight month in September as the auto sector was hit by a persistent global supply shortage.

The data raised the risk of an economic contraction in the third quarter and throwing Japan’s recovery into doubt.

Output disruptions across Asia and slowing growth in China have clouded the outlook for the world’s third-biggest economy, which has depended heavily on exports to boost growth as the Covid-19 pandemic hurt domestic demand.

“The risk looms that third-quarter gross domestic product turned negative,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“Shipments of capital goods declined. That suggests business investment has not been growing.”

Factory production slumped 5.4 per cent in September from the previous month, official data showed on Friday (Oct 29), hurt by falling output of cars as well as general-purpose machinery.

That meant output shrunk for the third consecutive month, after falling 3.6 per cent in August and 1.5 per cent in July.

It was the largest month-on-month decline since a 6.5 per cent drop in May, and weaker than a 3.2 per cent loss forecast in a Reuters poll of economists.

Seven out of eight Japanese automakers are seeing global output drop in September, as the global parts and chip shortage weighed on the sector.

Toyota Motor said on Thursday it saw global output slumping 39.1 per cent in September from a year earlier, while cuts by automakers are also starting to affect suppliers.

Friday’s data showed output of cars and other motor vehicles lost 28.2 per cent from the previous month in September, falling for the third straight month, while its shipments sank 32.5 per cent month-on-month.

The data showed overall inventories rose 3.7 per cent from the previous month, their largest gain since comparable data became available in 2015, which is likely to have offset some of the weakness in third-quarter output and possibly exports.

Downside risks

The government is due to release a preliminary gross domestic product estimate for July-September on Nov 15.

“Across Q3, manufacturing output fell 3.7 per cent quarter-on-quarter,” said Tom Learmouth, Japan economist at Capital Economics.

That contraction is “posing clear downside risks to our view that quarterly gross domestic product growth was zero last quarter,” he said in a note.

Friday’s data showed manufacturers surveyed by the Ministry of Economy, Trade and Industry expected output to rebound ahead, forecasting a 6.4 per cent gain in October and 5.7 per cent in November.

A government official warned output may not expand as much as forecast, as worries over chip and parts supply shortages persisted.

However, Norinchukin’s Mr Minami said a recovery in service-sector sentiment following the government’s easing of coronavirus restrictions was likely to support the economy in the coming months.