Industrial production increased 2.0% m/m in May (April: 0.9%), surprising to the upside (Barclays: -0.2%; Bloomberg: 0.4%) and marking a fourth consecutive gain. METI left its assessment intact, saying “modest recovery movements can be seen.” Production bottomed last November and has continued to pick up since then.
METI forecast indices pointed to a 2.4% m/m decrease in June, which would mark the first decline since the current government took office in December, and a 3.3% increase in July. Most industries forecast a decrease in June and an increase in July. Notably, however, transport machinery projected a 6.3% increase in June after May’s 6.8% pullback. This forecast might be viewed as signalling a recovery in overseas demand. However, there has been a noticeable regional disparity in transport machinery exports, which have been firm to the US, but weak to Europe and China.
Using the METI forecast index for June, production is on track to increase 1.8% q/q in Q2, a second consecutive expansion. With the production data rebased to the year 2010 from 2005 this time around, the quarterly increase in Q1 was lowered to 0.6% from 2.2%. As a result, production appears to have accelerated in Q2.
We believe there is a risk that analysis centered around industrial production will underestimate the momentum of the Japanese economy through 2014. This reflects the retirement of Japan’s baby-boomers, who were born in 1947-49 and are currently in the process of turning 65. The elderly may: 1) prefer services over goods; and 2) shift from flow (income) to stock (financial assets) as a source of funding this consumption. The first factor may have weakened the link between consumption and industrial production. Indeed, consumption has been firm since 2012, when the baby-boomers began to retire, while production has lagged. Until 2014, when this retirement process reaches a climax, we believe IP-centered analysis could underestimate the strength of the economy.
In separately released employment-related data, the jobless rate stayed at 4.1% in May, in line with expectations, without any major changes to either the number of employed (up 20,000 m/m) or the number of unemployed (down 10,000 m/m). The jobs/applicants ratio improved to 0.90 in May from 0.89 in April, matching Barclays and consensus expectations. The trend of improvement in employment indicators took a breather in H2 12, but has resumed this year. According to an earlier data release, wages per worker turned flat y/y in April, pulling out of negative territory for the first time in three months. Data for May will be released on 2 July.
Barclays