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By Harumi Taguchi, principal economist at IHS Markit

Key Points:

Ÿ   Japan’s Index of Industrial Production (IIP) rose 2.1% month on month (m/m) in August following a 0.8% drop in the previous month.

Ÿ   Producers’ shipments also increased by 1.8% m/m, reaching the highest level since January 2014, and inventory declined 1.1% m/m for the third straight month, leading to a 4.3% m/m drop in the inventory ratio.

Ÿ   The improvement largely reflected solid rebounds in the production of general-purpose, production and business-oriented machinery, transportation equipment, information and communication electronics equipment, and a continued increase in the production of electronic parts and devices.

Ÿ   While the major contributor to the increase of producers’ shipments was general-purpose, production and business-oriented machinery, improvement in shipments from a broad range of industry groups led to progress in destocking, and continued demand supported restocking of electric parts and devices and some other industry sectors.

IHS Markit Views:

Over the near term, the IIP is likely to remain volatile but a relatively solid uptrend will continue. Although most industries anticipate declines in production (a 1.9% m/m drop in September), solid rebounds in the production of general-purpose, production and business-oriented machinery, electric machinery, and electric parts and machinery helped outlooks for October turn positive with a 3.5% m/m rise.

The August results suggest continued demand (particularly for electric parts and devices, and related machinery), and progress in destocking will support near-term production. Uptrends in demand for general-purpose, production and business-oriented machinery and transportation equipment could mean stronger capital expenditure in response to improved capital utilization and demand to counter labor shortages with machinery and equipment.

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