April Industrial Production

◆The April 2016 indices of industrial production was up by +0.3% m/m, registering growth for the second consecutive month, while exceeding market consensus (-1.5%), which had expected a lower result due to the recent Kumamoto earthquake. Meanwhile, the shipment index was up by +1.5% m/m, while the inventory index declined by -1.7% and inventory ratio fell by -2.2%, the first decline in two months for both inventory measurements. The METI production forecast survey sees a continuation of the gradual comeback for production, with May seen up by +2.2% and June up by +0.3%. Overall, production in April shows favorable results, with progress observed in inventory adjustment and only limited influence from the Kumamoto earthquake.

◆Production is expected to continue in a weak tone for some time. Complete recovery for domestic demand, which depends largely on consumption, will likely take time due to sluggish growth for wages and household income for pensioners. In addition, the earnings environment for corporations is worsening due to the progressively strong yen, and this will very likely narrow the focus of domestic capex to labor-saving as a means of handling the shortage in manpower, research and development, and energy-saving. As for overseas demand, while strengths and weaknesses are expected, the steady undertone should continue. The US economy continues to show a steady undertone especially in the household sector, and this is expected to compensate for Japan’s ailing exports of capital goods by encouraging exports of durables.