Foraging Through Japan’s February Data

The last two weeks brought a wave of economic data to Japan’s shores—just as pundits stress over the war’s effects and weigh whether Prime Minister Sanae Takaichi’s mooted budget will boost the country’s economy. And at first look, the data appear mixed. But in context, they signal an economy in fine shape before the Iran war began. That likely hasn’t changed much even with the war and associated disruptions to Japanese oil supplies, budget “boost” or no.

Let us start with industrial production, which fell -2.0% m/m in February, partially reversing January’s strong 4.6% m/m.^[i] The weakness was broad based, but motor vehicle and fabricated metal production posted the biggest reversals, falling -3.6% m/m and -5.9% after growing 8.1% and 6.0% in January, respectively.^[ii] Both main weak spots appear symptomatic of front-loaded January demand as auto dealers and manufacturers of machinery and construction equipment sought to restock inventories following December’s uptick in new vehicle sales and robust capital equipment sales.^[iii]

This seemed the broader theme here—much of February’s fall appeared to boil down to month-over-month math as Japanese factories restarted in January following yearend maintenance, which a seasonal factor adjustment may struggle to account for. Still, February looks more like moderation than fundamental weakness. Consider: February’s output level was still above December’s, pointing to overall growth year to date.

On a more forward-looking basis, machinery orders fell -5.0% m/m, skewed by lumpy big-ticket orders.^[iv] Core machinery orders (a partial leading indicator for business investment), which strip these out, smashed expectations, rising 13.6% m/m (24.7% y/y).^[v] Officials also noted overall machinery orders trending up—a positive for future Japanese production. So overall, the data point to Japanese manufacturing—roughly 20% of GDP—being in ok shape heading into the war.^[vi]

Elsewhere, retail sales fell -0.1% y/y in February, cooling after January’s 1.8% rise.^[vii] It is the third contraction in six months, continuing a back-and-forth cooling trend since 2025’s start. To us, this suggests consumers’ discretionary spending remained soft before the war began—not great, but this has been the case for over a year now, so it isn’t sneaking up on stocks.

Most retail weakness was concentrated in fuel sales, online shopping and clothing purchases. For context, Japan’s retail sales are calculated in value terms (as opposed to sales volumes, like in the UK and eurozone), helping explain why fuel sales fell: Japan’s government scrapped a decades-old gasoline surcharge at 2025’s end, contributing to falling prices at the pump this year and “weakness” in these data.^[viii] So the fall looks more like consumer relief than falling demand when you consider the context.

As for online and clothing sales, though, things weren’t as sunny. February’s slip extended from January, a sign Japanese consumers remain hesitant over discretionary purchases. A lot of that non-fuel retail weakness likely stems from tepid wage growth amid last year’s accelerating Japanese inflation. But there are now signs that is reversing: Real (inflation-adjusted) wage growth rose 1.9% y/y in February—beating estimates and accelerating from January’s 0.7%.^[ix] These 2 months’ growth follows 12 consecutive months of inflation outpacing wages, meaning Japanese consumers are finally regaining some purchasing power. If this continues, it should buoy consumers’ overall health, a potential positive for discretionary spending ahead.

Yes, yes, we know. All this is before the war. Any relief from weaker fuel prices before likely changes in March’s data. But we doubt the country is in the dire straits many think. Early data, like flash purchasing managers indexes, point to a moderating but still growthy services sector—on top of a healthier-than-feared manufacturing sector.

Energy prices don’t point to calamity, either. Yes, Japan imports a significant amount of its oil and gas from the Middle East, unlike most of Europe and the US. But while Japan’s liquefied natural gas (LNG) import prices exceed pre-war levels, they remain well below levels seen in 2022 and 2023 following disruptions from Russia’s war in Ukraine.^[x] GDP grew both years. If much-higher prices then didn’t crush Japan’s economic growth, we doubt today’s prices will.^[xi] Plus, Japan can also support higher prices by replacing its Hormuz-bound oil and gas from other countries it buys from, like the US, Australia and producers in West Africa.

On top of this, Japan’s government has already stepped in to quell potential energy shortages by releasing some of its ginormous oil reserves, upping coal power production and restarting part of its Kashiwazaki-Kariwa nuclear power station. Oh, and the government just announced a $10 billion package to help other Southeast Asian nations secure oil and gas—not what you would expect if an acute crisis loomed at home.^[xii] So while Japan’s economy isn’t in perfect shape, it is adapting well to wartime disruptions to keep things running. It doesn’t seem like the catastrophe some headlines suggest.

Moreover, all this resilience comes without major stimulus from Takaichi’s administration. Ever since her Liberal Democratic Party secured a supermajority in February, pundits have weighed whether Takaichi will pursue her campaign aims of tax cuts, investment incentives and other fiscal stimulus. But from what we can see, Japan’s economy has already proven it can adapt and grow without this. Besides, such measures rarely do much more than create winners and losers rather than boost growth economywide. Serial “supplemental budgets” and fiscal stimulus under Takaichi’s many recent predecessors illustrates that point well.