Japan: Strong production rebound in September

As expected, industrial production rebounded strongly in September, 2.7% m/m. Production may have edged down in October by 0.1%. The outlook for the different sectors is very mixed. The construction related and exporting firms have the best prospects. By contrast, companies selling mainly to the domestic market expect demand to stagnate.

As expected, industrial production rebounded strongly in September, 2.7% m/m, the biggest increase in 8 months. It follows a 1.9% decline in the preceding month. In Q3, production actually contracted by 2% from the previous quarter. Moreover, inventories, which had reached relatively high levels, declined.
Production was underpinned by strong external demand. In September exports rose by 1.8% in volume. Another factor is the strong demand for construction goods related to the public investment programme and the reconstruction of the Tohoku area.
The volatility in recent months is partly related to the VAT hike in April, which boosted production in the run-up to the tax increase. In addition, production during the summer months was disrupted by extremely bad weather.
According to the METI’s forecast, production may have edged down in October by 0.1%, but could rebound by 1% in November. However, the outlook for the different sectors is very mixed. Production in the construction-related sector is likely to remain rather robust. Production in the car industry and related sectors might improve as the effect of the VAT hike is waning. By contrast, semiconductor shipments could deteriorate substantially in the coming months. Chemical producers mainly selling in the domestic market expect demand to stagnate. Moreover, they find it difficult to pass on the increase in production costs related primarily to rising raw materials prices in JPY to their customers.
The production and GDP data to be published on 17 November will be closely watched by the government. The authorities have to decide soon whether to go ahead with the planned 2-point VAT hike on October 2015. In our opinion, the government will raise the VAT rate to 10%, but this will be partly compensated by an additional spending plan.

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