Tuesday, July 30, 2013

Japan's industrial production drops at the fastest pace since the Fukushima disaster

Japan experienced a surprisingly strong decline in industrial production in June, which many view as temporary.

Japan Industrial Production (source: Econoday.com)

The Japan Times: - Industrial production fell in June by the most since March 2011, when the Great East Japan Earthquake and tsunami struck, as automakers cut output after a gain the previous month.

Output declined 3.3 percent in June from May, the Ministry of Economy, Trade and Industry said Tuesday, marking a steeper fall than any economist forecast in a Bloomberg survey in which the median of 29 estimates was for a 1.5 percent drop.

In May, output climbed the most since December 2011. Production slid 4.8 percent in June from a year earlier.

Tuesday’s report adds to the challenges facing Prime Minister Shinzo Abe, who must decide whether to proceed with the consumption tax increase even though it could slow down a rebound in the economy. Weakening production would undermine his calls for higher wages to bolster his reflation efforts after temporary boosts from monetary and fiscal stimulus.
Indeed this adds to the concerns described earlier (see post). Japan's new government needs to improve wage growth in order to keep up with rising prices. Without stable pay increases - which have been declining for years in large part due to demographics and Japan Inc.'s approach to cost adjustments - reaching sustainable inflation rate will be difficult. Yet higher wages could also reduce the competitiveness of Japanese companies. That is why this sudden drop in industrial production, if not corrected in July, could become an issue.

Update: This morning the report on July Markit Manufacturing PMI for Japan came out. Once again, the number was surprisingly weak.

Source: Econoday
Markit: - “After a promising Q2, Japan’s manufacturing expansion slowed in July. The decelerating growth of output and new orders, combined with falling employment, painted a less encouraging picture than that indicated by previous surveys. Nevertheless, July marked the fifth consecutive month of expansion in the manufacturing sector.

“The weakness of the yen continued to act as a mixed blessing for Japanese producers; with exporters benefiting from improved international competitiveness, but importers suffering as their input costs continued to rise.”
Now that we have some indications about July, maybe the drop in June industrial output wasn't just a temporary blip. The Nikkei dropped 200 points in response as investors begin to reassess the sustainability of the recent pace of growth.

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