Japan factory output falls for second month as Iran war disrupts energy supply chains

Japan’s factory output fell for a second straight month in March, undershooting expectations as energy supply disruptions linked to the Iran war dented chemical production and fuel output.

Data released by Ministry of Economy, Trade and Industry (METI) on Thursday showed factory output fell 0.5 per cent from the previous month, defying market expectations of a 1.1 per cent increase.

The soft production data adds to signs of a gradual cooling in Japan’s economy. Earlier this week, government figures showed the unemployment rate edged up to 2.7 per cent in March, with employment falling and hiring momentum easing.

While export growth has remained resilient, supported by firm global demand, rising energy costs and geopolitical uncertainty are increasingly weighing on corporate margins and business confidence.

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The decline in industrial production was led by a sharp contraction in chemical and fuel-related production, sectors highly sensitive to feedstock availability and energy costs.

Output of polyethylene plunged 27 per cent in March, while polypropylene production dropped 15 per cent, reflecting disruptions in supply chains tied to crude oil flows.

Fuel production also weakened across the board. Gasoline output fell 7.3 per cent, while diesel production dropped 14.3 per cent, highlighting the broader impact of constrained energy supplies on industrial activity.

Japan’s heavy reliance on imported energy has amplified the shock. Nearly 95 per cent of its crude oil imports come from West Asia, much of it transported via the Strait of Hormuz, which has been effectively shut following the escalation in the Iran war. The disruption has tightened feedstock availability for petrochemical producers and raised input costs for manufacturers.

METI said Japan currently holds around 1.8 months of inventory for key intermediate chemical products, which has helped cushion the immediate impact on downstream industries. However, the outlook remains fragile.

A survey of manufacturers by the ministry points to continued weakness ahead, with firms expecting output to decline a further 0.7 per cent in April.