Japan industrial output shrinks less than initially thought

Japan’s industrial production fell 1.2% month-over-month in July 2025, a slightly smaller decline than the preliminary estimate of -1.6% but still reversing June’s 2.1% gain. It marked the sharpest monthly contraction since November 2024 and underscored the fragility of Japan’s manufacturing recovery in the face of both domestic and external pressures.

The drop was broad-based, with sharp weakness concentrated in key export-oriented industries. Motor vehicle output plunged 6.7% after a modest 0.5% rise in June, as automakers faced weaker overseas demand amid new US tariffs and supply chain bottlenecks in semiconductors and critical materials.

Production machinery fell 6.3% compared with a 0.5% gain previously, while general-purpose and business-oriented machinery contracted 4.5% after rising 1.6% in June, reflecting cutbacks in capital spending and cautious corporate investment sentiment.

Beyond manufacturing, the steel sector continued to struggle with sluggish construction demand both at home and abroad, while global overcapacity pressured margins. Energy-intensive industries also faced cost headwinds from higher raw material imports, adding to the drag.

On a yearly basis, industrial output fell 0.4% in July, a sharp reversal from June’s 4.4% increase, which had been the strongest annual growth since September 2022. The swing illustrates how volatile the recovery remains, with temporary rebounds quickly offset by structural challenges tied to global trade uncertainty and weak domestic demand.

Looking forward, industry surveys suggest production could recover modestly in August and September, helped by restocking and stable electronics output, but the broader outlook remains clouded.

Analysts warn that persistent trade frictions with the US, the slowdown in China, and weak European demand may continue to weigh on Japanese exports. At the same time, firms are cautious about expanding capacity until they see clearer signs of global demand stabilization.