Japan: ICT Demand Boosted Production

Industrial production rose by 1.8% in October, the first rise in four months. This was much better than expected. Based on METI’s production forecast (-1.5%) and the poor export performance for October (-2.9%), the consensus had expected a 2% decline.

However, today’s result does not yet signal an overall recovery of the industrial sector. It was spearheaded by a sharp increase in the production of electronic parts and devices (14.7%). This is related to the bottoming out of the IT goods cycle, driven by the releases of new smart phones (Iphone 5) and PCs (Windows8).

Also the sectors fabricated metals and transport equipment reported output increases by 4.1% and 1.1%, respectively. Nevertheless, production in the car industry is more than 16% below last year’s level. This is partly due to the expiration of the subsidies for purchasing eco-friendly cars in September. Moreover, the car industry has been negatively affected by the slowdown of external demand and the strength of the yen. This has been exacerbated by the recent diplomatic spat between Japan and China concerning three inhabited islets.

The short-term outlook for the industrial sector is mixed. METI expect production to stabilise in November and to rebound sharply in December (7.5%). This looks rather optimistic, as inventories remain at a relatively high level. Moreover, the OECD composite leading indicators continue to point to weak growth prospects in many major economies, although signs of stabilisation are emerging in China and the United States. Lastly, relations with China are likely to remain tense in the run-up to the general election on 16 December.

We may expect a pick up in activity in early 2013. A major priority for the incoming government is to resolve the territorial conflict with China. Moreover, by that stage, the uncertainly concerning the resolution of the US fiscal cliff, which has depressed US demand for capital goods, should be lifted.

By Raymond VAN DER PUTTEN

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