May Industrial Production

◆In Indices of Industrial Production (preliminary; Ministry of Economy, Trade and Industry [METI]), industrial production posted the fourth consecutive m/m gain in May (up 2.0%) and substantially overshot market expectations (up 0.2%), confirming that the underlying recovery continues. Shipments saw the first gain in three months (up 0.8%), while inventories saw the first slide in two months (down 0.3%), resulting in the second consecutive monthly decline (improvement) in the inventory-shipment ratio (down 2.1%).

◆The current METI survey projects overall production to decline 2.4% m/m in June but to increase 3.3% in July, meaning industries expect production to grow at a slower pace. Industries project declines across the board in June. In particular, iron/steel and transportation equipment will pull down overall production. Meanwhile, transportation equipment and general-purpose/production/business-oriented machinery project substantial gains in July, firming up overall production.

◆We expect production to maintain the uptrend going forward. Export volume is likely to gain momentum as the effects of a weak yen trend that started at end-2012 will likely emerge in full swing with a lag, driving overall production. In addition, public works projects should accelerate with execution of the FY12 supplementary budget. At the same time, domestic demand will probably increase at a growing pace toward end-FY13, reflecting front-loaded demand prior to a consumption tax hike scheduled for April 2014. Such public and private sector factors are anticipated to boost production overall.