July Industrial Production

◆In Indices of Industrial Production (preliminary; Ministry of Economy, Trade, and Industry [METI]), July industrial production saw the first m/m gain in two months (up 3.2%). Although it undershot market expectations (up 3.6%), the gain was strong enough to offset the plunge in June. This confirmed a firming up. Shipments saw the first gain in two months (up 1.3%), while inventories increased (up 1.5%), resulting in the first decline (improving) in two months in the inventory-shipment ratio (down 0.5%).

◆Production increased m/m in July for 12 industries out of 15 for which data is available on a preliminary estimate basis. Production was firm in general. Following sharp declines in June, assembling industries, such as general-purpose/production/business-oriented machinery, electronic components/devices, and transportation equipment, saw strong gains, pushing up 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 surging demand prior to a consumption tax hike scheduled for April 2014.