Japan: Manufacturing Losing Momentum

Manufacturing in Japan currently is clearly losing momentum as industrial production in January declined more than expected, -2.0% mom/+2.5%yoy (consensus: -0.6% mom/+3.6% yoy). According to production plans production is expected to decline by 2.9% mom in February. However this decline is expected to be reversed by a +2.8% mom increase in September (see chart).

The loss of momentum in industrial production is partly explained by slower export growth. Real export growth has slowed from 6% 3m/3m in mid 2007 to about 2.5% 3m/3m in January (see chart). However export growth has stabilised - at least for the moment - on the back of surprisingly strong January trade figures, and at 2.5% 3m/3m growth export growth is still quite respectable. With industrial production currently declining -0.8% 3m/3m export performance is not the only the only reason for the current weakness. Domestic demand probably has been a major drag on industrial production since mid 2007 on the back of both weak private consumption and the plunge in housing construction.

However there are some comforting signs that industrial production is not going to collapse in the short run:

- Actual shipments only dropped -0.9% mom in January returning the inventory/sales ratio to normal levels (see chart). Looking at actual shipments the trend over last 3 months has been flat (0.0% 3m/3m) rather than declining, as witnessed by the industrial production figures (-0.6% 3m/3m).
- Growth in real exports has stabilised, and overall growth is still respectable and indicates that net exports will continue to contribute positively to GDP growth in Q1 2008 although less than in Q4 2007. That said, export growth is expected to slow further in H1 2008 and there is considerable downside risk to exports.
- The negative impact on industrial production from domestic demand is expected to ease somewhat although production of construction goods continues to be a significant drag on overall industrial production (-2.0 3m/3m), there have been clear signs of stabilisation in recent months (see chart).

Conclusion:

We continue to believe that the overall trend in industrial production is flat. However, today's industrial production figures indicate increasing risk of declining industrial activity in Japan. They underline considerable downside risk to the Japanese economy as industrial activity was the main bright spot in the Japanese economy in H2 2007. We maintain our expectation of +0.3% q/q GDP growth in Q1 2008. However, today's figures underline that there is downside risk to even this weak number.

Danske Bank

Posted in: Forex