June Industrial Production

◆In Indices of Industrial Production (preliminary; Ministry of Economy, Trade and Industry [METI]), June industrial production saw the first m/m slide in five months (down 3.3%) and undershot market expectations (down 1.5%). It also declined for the first time in five months on a three-month moving average basis, putting a brake on firming up. However, the production forecast survey projects advances going forward. Thus, we maintain our view that the firming up of production continues.

◆Production declined m/m in June for 13 industries out of 15. The sluggish result was as projected in the production forecast survey released in June. Prominent declines were seen in assembling industries—transportation equipment, electronic components/devices, and general-purpose/production/business-oriented machinery—, pulling down overall production.

◆We expect production to maintain the uptrend going forward. Whether production will steadily advance or not will depend on export volume. In this regard, a possible slowdown in emerging market economies raises concerns. However, reflecting economic growth in the US and the effects of a weak yen, the ongoing uptrend in export volume is likely to continue, driving production. Meanwhile, domestic demand will probably increase at a growing pace toward end-FY13, driving overall production. Behind this are increased public works projects following execution of the FY12 supplementary budget, as well as front-loaded demand prior to a consumption tax hike scheduled for April 2014.