Japan’s industrial output drops sharply after May surge with uptrend seen over the near term

Photo by Government of Japan

By Harumi Taguchi, Principal Economist at IHS Markit

Key Points:

  • Japan’s IIP (Indices of Industrial Production) fell by 3.3% month-on-month (m/m) in May following a 4.0% surge in the previous month.
  • Producers’ shipments also declined 2.8% m/m and inventory rose by 0.1% m/m for a sixth straight month, but the inventory ratio fell by 1.9% m/m following two consecutive months of increases.
  • Larger-than-expected decline in production largely reflected an 11.7% drop in the production of transport machinery following a 10.8% surge in the previous month, and weakness for a broad range of industry groupings, including general purpose, production and business-oriented machinery, fabricated metals, and chemicals (but excluding drugs).
  • Major contributors to the decline for producer’s shipments were transport machinery, iron and steel, electric parts and devices, and information and communication electronics equipment.

IHS Markit View:

Industry producers anticipated a 1.8% m/m increase in June, with expectations of a rebound in the production of transport machinery, general purpose, production and business-oriented machinery and some other industry groupings before sliding down by 0.1% m/m in July.

Although the IIP could increase 1.6 % from the previous quarter if production matches the industry producers’ outlook, downside revisions to the June production outlook in a broad range of industry groupings could reflect softer demand or weaker orders than was previously expected.

IHS Markit expects the uptrend in Japan’s industrial production to continue over the near term largely on account of ongoing external demand, which could fuel capital expenditures to some extent. That said, unexpected rises in inventory (despite declines in production) for some industry sectors could result in more moderate production over the near term.