Japan: Industrial Production Recovery Remains Strong
- Industrial production in September increased for the seven month in a row and production plans suggest the recovery could pick up some speed in coming months on the back of low inventories and strong exports.
- Today's industrial production data suggest that Japan's GDP growth is currently substantial above potential. In line with other Asian data released recently it suggests that the recovery has gained strength in late Q3.
Industrial production appears to be picking up some speed again
Industrial production in September increased 1.4% m/m, slightly more than expected. This is the seventh month in a row with an increase in industrial production and we are now 23% off the bottom reached in February.
The details in today's report are very strong. Shipments surged 3.4% m/m and inventories declined further by 0.5% m/m, resulting in another sharp drop in the inventory-sales-ratio (see charts on next page). Although the inventory-sales-ratio remains high, this suggests that the near-term outlook for industrial production remains very strong.
This is supported by the strong production plans published for October and November. According to the productions plans, Japanese manufacturers plan to increase industrial production by 3.1% m/m in October and +1.9% m/m in November. This suggests that growth in industrial production might be picking up some speed again compared to recent months.
In addition, the recovery in industrial production appears to have become more broad based. Production of capital goods - the so far weakest part of the manufacturing sector - has picked up substantially in the past two months, surging 6.3% m/m in September following a solid 3.1% m/m increase in the previous month (see chart on next page).
Is Japan currently growing substantially above potential?
Implication: For Q3 as a whole industrial production is up 8.3% q/q following a 7.3% q/q increase in Q2. Based on production plans it appears growth in industrial production in Q4 will increase close to 7% q/q. As seen in the chart to the right this is a significantly faster recovery than after Japan's past two recessions, albeit at a much more depressed level. However, it is a very strong indication that GDP growth in Japan is currently substantially above potential growth. We expect GDP growth above 4% q/q AR in Q3 and only slightly lower in Q4.
Today's industrial production data for Japan are in line with other September data released across Asia so far, suggesting renewed strength in the recovery in late Q3. While the markets may be a bit worried about the strength of the global recovery this morning, this is certainly not the message we are getting.
Danske Bank
http://www.danskebank.com/danskeresearch
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