December industrial production: Manufacturers counting on an export boom

Feb. 13, 2013, 16:00 JST


Japanese manufacturers are planning to expand their output by as much as 7% between December 2012 and February 2013. Anticipated recovery in Japanese exports seems to lie behind the planned output expansion. The manufacturing recession that started in May 2012 seems to have ended in November 2012 and Japan is now in a recovery period. In an optimistic scenario, the recovery would last until April 2014 when the likely fiscal tightening takes Japan back into a recession. In a pessimistic scenario, fiscal half-cliff in U.S may cut short the recovery in the global economy in mid-2013. 


Japanese industrial production to surge in early 2013

The industrial production (IP) in Japan expanded by 2.5% in December. The 2.5% increase was the fastest monthly pace of expansion since May-June 2011 period when Japan was in the post-earthquake recovery period. There was more good news in the December IP report. According to a survey published together with the December IP results, Japanese manufacturers are planning to aggressively expand their output in the first two months of 2013. They plan to raise their monthly output by 2.3% in January followed by further 2.6% expansion in February. Such expansion will recover most of the production cuts implemented through the mid-course of 2012 in Japan. 


Rapid expansion will bring the output back to early 2012 level



What will manufacturers do with the increased output?

As you can see from the chart below, Japanese industrial production is strongly correlated with its exports. It is likely that the planned expansion in the industrial production is a reflection of an anticipated recovery in exports abroad. Indeed, according to the preliminary trade data covering the first 20 days of January 2013, exports are up 3.2% year on year during the period. If such trend is maintained for the whole of January, the month will see a first year on year positive expansion in exports in 8 months. Together with the falling yen, such expansion in exports is welcome news for Japanese exporters.  


Manufacturers are probably counting on exports to recover

Source: METI, MoF, CEIC, JMA


Is the output expansion sustainable? 

The prospect for a sustained output expansion looks much better than it did a few months earlier. US policy makers are slowly, but gradually smoothing out the fiscal cliff. Japan-China trade relationship seems to be on the mend. 'Abenomics' has already translated into an increased public spending in 2013 and sizably improved sentiments both among households as well as corporates. So all is well?


While we admit that we have been overly pessimistic on Japan’s near term economic outlook in the last few months, we continue to think there are still a number of concerning risk factors. In the US, fiscal cliff is being averted, but even then, some scale of fiscal tightening will occur in US in 2013. In our estimates, US households are still in for a 1-2% reduction in their disposable income due to the expiration of payroll tax holidays that already took place in January this year. There are other tail risks that could derail the recovery in 2013. In our view, China-Japan relationship seems precarious and the Euro crisis is not over. While we welcome the positive turn of events in both financial markets and ion the real economy, we feel that the global economy is still burdened by the negative legacy from the great recession between 2007-2009 and we are at a period where the financial markets are starting to underestimate the downside risks in the world.