May Industrial Production

◆The May 2016 indices of industrial production was down by -2.3% m/m, registering a decline for the first time in three months, while falling considerably below market consensus (-0.2%). Meanwhile, the shipment index also fell steeply by -2.3% m/m, its first decline in three months. The inventory index grew by +0.3% and inventory ratio was up by +1.3%, registering growth for the first time in two months. The METI production forecast survey sees modest growth for production in June (+1.7%) and July (+1.3%), but in consideration of the average realization rate in the past, as well as turmoil in the financial markets stemming from the decision of the UK to withdraw from the EU, chances are that production will continue to be weak in the future.

◆Production is expected to continue its weak tone for some time. Complete recovery for domestic demand, which depends largely on consumption, will likely take time due to sluggish growth in disposable income for working families 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, the possibility of further declines is a concern, due to turmoil in the financial markets in reaction to the decision of the UK to leave the EU. As for exports to Europe, the collapse in the price of oil and quantitative easing implemented by the ECB had been encouraging a comeback until now, but the recent political decision could dampen the recovery in demand in the EU. The US economy continues to show a steady undertone especially in the household sector, but other areas are cause for concern, such as demand for capital goods and the trend in the corporate sector. Meanwhile, in regard to the Asian economy, fears associated with the tightening of US monetary policy are on the wane, and the negative influence of capital outflows in association with this factor are gradually abating. However, caution is required regarding the possibility that demand could decline further due to turmoil in the financial markets stemming from the situation in the EU.