JP: Industrial Production

Highlights

Japan's industrial production posted its second straight rise in May, up a modest 0.5% on the month (consensus +1.3%), led by higher output at petrochemical plants and refineries, as the government is helping increase imports of crude oil and naphtha, the key material for producing plastics and resins, from the United States and other countries, bypassing the Middle East. The blockade of the Strait of Hormuz, the crucial passage for energy and commodities exports from the Mideast Gulf, had reduced factory output in Japan.

May's increase follows April's downwardly revised 0.5% rebound on a 0.4% dip in March. Overall, it reflects solid export demand for production machinery from Europe, global needs for computer chips and a pickup in shipments of vehicles to the key U.S. market.

Japan has increased crude oil imports from other regions to reduce its heavy reliance on the Middle East and the U.S.-Iran ceasefire agreement this month has led to the reopening of the Strait of Hormuz. But the blockade of the crucial pathway until recently choked off energy and commodities exports from the Mideast Gulf, causing shortages of naphtha and other materials and hurting output of plastics and resins used in vehicles, appliances and food packages.

The monthly survey by the Ministry of Economy, Trade and Industry indicated that output would rise 2.6% on the month in June, led by a rebound in the production of equipment to produce flat panel displays, general machinery to make analytical instruments and electric/telecom products (laptop computers), all of which dropped in May. Factory output is projected to be flat in July.

The ministry maintained its assessment that industrial output was"taking one step forward and one step back." The last change was made in the July 2024 report, when it upgraded its view.

Details:

Japan May industrial output +0.5% m/m (Apr revised to +0.5% from +0.8%); 2nd straight rise; median forecast +1.3% (range: +0.8% to +2.3%)

Japan May industrial output -1.7% y/y (Apr revised to +2.0% from +2.3%), 1st fall in 6 months; median forecast -0.9% (range: -1.4% to +0.1%)

Japan METI keeps view: industrial output taking one step forward and one step back

Japan METI forecast index: June industrial output +2.6% m/m (adjusted for upward bias), July 0.0%

Japan METI: May industrial output m/m rise led by aircraft engine parts, petrochemical products, fuels

Japan May industrial output shows m/m fall in general machinery, laptop computers, flat panel displays-producing equipment

Japan May industrial output: 7 out of 15 industries are up, 8 are down

Market Consensus Before Announcement

Japanese industrial output is expected to rise for a second straight month in May after posting an unexpected increase in the previous month, even as the geopolitical tensions in the Middle East stayed in place. Solid domestic business sentiment and continued growth in exports are seen supporting production on a month-on-month basis, although output is expected to fall from a year earlier for the first time in six months.

Industrial production in May is projected to rise 1.3 percent on the month, following a revised 0.5 percent increase in April. The forecast is broadly in line with the Ministry of Economy, Trade and Industry's adjusted production forecast index, which points to a 2.1% increase in output during the month.

On a year-on-year basis, output is expected to fall 0.9 percent in May, marking the first decline in six months, after a revised 2.0 percent increase in April from the initial 2.3 percent.

Definition

Industrial Production measures the physical output of the nation's factories, mines and utilities. Factories manufacture various products, and the industrial production indexes have been prepared as a comprehensive indicator of wide-ranging production activities for such products and are regarded as some of the most important among economic indexes.

Description

Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more subdued growth that won't lead to inflationary pressures. By tracking economic data such as industrial production, investors will know what the economic backdrop is for these markets and their portfolios.

Industrial production provides key industry data for this export-dependent economy. The data are issued twice a month-a preliminary estimate at the end of the month for the preceding month and a revised estimate about two weeks later. All products, whether sold domestically or abroad, are included in the calculation of industrial production. Industrial production is highly sensitive to the business cycle and can often predict future changes in employment, earnings and income. For these reasons industrial production is considered a reliable leading indicator that conveys information about the overall health of the economy. This report has a big influence on market behavior. In any given month, one can see whether capital goods or consumer goods are growing more rapidly. Are manufacturers still producing construction supplies and other materials? This detailed report shows which sectors of the economy are growing and which are not.

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