May Industrial Production

◆The May 2015 indices of industrial production was down by -2.2% m/m, its first decline in two months, in comparison to the +0.5% forecasted as of last month. Results were well below market consensus (-0.8%), revealing negative performance.

◆This month’s results indicate that the moderate recovery phase, which has continued in production since bottoming out in August of 2014, has hit a temporary lull. The main causes are thought to be stagnant exports and inventory adjustment, with the soft patch expected to continue for a while. According to the METI forecast survey, June production is expected to be up by +1.5% in comparison to the previous month, with July up by +0.6% in a continuation of the moderate recovery. However, considering the realization rate of the METI forecast in recent months, as well as its amendment rate, it is quite possible that results will be marking time.

◆As for the future of industrial production, the growth trend is expected to continue supported by the underlying strength of exports once it has gotten through this temporary adjustment. Domestic demand should improve with the positive employment environment and the collapse in energy prices. However, there tends to be a time lag before real income pushes consumption up due to the ratchet effect, while in addition, the high level of inventory rate and lead time required before exports to the US and China can recover means that possibilities are good that production will continue in a temporary lull.