JP: Industrial Production

Highlights

Japan’s industrial production unexpectedly posted a second straight decline in August, down 1.7% on the month (consensus was +1.7%), hit by lower output of transport equipment (automobiles and engines), general machinery (conveyors, cranes), fuels (gasoline, diesel and kerosene) and communications equipment (computers, external storage devices), but the latest official forecast for September points to a 1.6% rebound, led by computers, autos and production machinery. Factory output marked its first drop in four months in July (revised down to -0.2% from the initial reading of +0.1%).

One dampening factor is a powerful 7.1-magnitude earthquake that shook Kumamoto Prefecture in southwestern Japan on July 28. It killed 38 people and injured many more while tearing roads and bridges and cutting off electricity and water supply. The disaster prompted automakers like Toyota and Honda and chipmakers including Renesas and Tokyo Electron to suspend production in the region for a few days.

The seasonally adjusted output index dipped to a three-month low of 102.6 after it slipped to a downwardly revised 104.4 in July. June’s 104.6 was the highest since 105.0 in December 2023. Production has shown some underlying strength backed by global demand for equipment to make memory chips amid the AI boom and the recent pickup in the auto sector.

The monthly survey by the Ministry of Economy, Trade and Industry indicated that output would rebound 1.6% on the month in September (adjusted for the statistics’ upward bias) and rise a further 3.1% in October, led by production machinery, semiconductors and computers.

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 Aug industrial output -1.7% m/m (July revised to -0.2% from +0.1%); 2nd straight fall; median forecast +1.7% (range: +0.3% to +2.0%)

Japan Aug industrial output +3.4% y/y (July revised to +3.9% from +4.1%), 3rd straight rise; median forecast +7.0% (range: +5.6% to +7.4%)

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

Japan METI forecast index: Sept. industrial output +1.6% m/m (adjusted for upward bias), Oct. +3.1%

Japan METI: Aug industrial output m/m drop led by autos, general machinery, fuels

Japan Aug industrial output: 12 out of 15 industries post fall, 3 are up

Market Consensus Before Announcement

Japan’s industrial production is seen rebounding on the month in August amid expectations of continuing demand for artificial-intelligence-related products, while a healthy global economy is supporting a solid trend in output.

August output is expected to increase amid positive signals from domestic manufacturing business conditions after the July output figure was revised downward, reflecting declines in the production of pharmaceuticals, alcoholic beverages and tobacco.

The domestic economy faces uncertainty from persistent inflation, amplified by a weaker yen that is driving up import costs, but the overall footing of the economy has remained solid, supporting the recent upward trend in industrial output.

The Ministry of Economy, Trade and Industry’s forecast released on August 31 showed that August output, adjusted for the upward bias in the forecast index, is expected to rise 3.1 percent from the previous month, while September output is forecast to reverse course and fall 4.2 percent. METI maintained its assessment at the time that industrial output was"taking one step forward and one step back."

Reflecting METI’s forecast, industrial output is expected to gain 1.7 percent from the previous month in August after July was revised down to a 0.2 percent decline from the preliminary 0.1 percent rise. The year-on-year uptrend is expected to remain in place, with output seen rising for a third consecutive month, increasing 7.0 percent from a year earlier, compared with a revised 3.9 percent rise in July.

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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