Friday, May 29, 2009

it’s by no means time to break out the daiginjo sake yet

TO BE NOTED: From Alphaville:

Japan: Land of the rising (output) surprise

Bikkuri shimashita (surprise, surprise), as they say in Japan.

What is going on there? In stark contrast to all the bleak news lately about plunging exports, factory closures and mounting lay-offs, official figures on Friday showed one of the biggest surges on record in second-quarter industrial output. Some commentators leapt on the figures to proclaim the worst of the current slump is over for the world’s second largest economy. At the very least, according to some analysts, companies are beginning to “normalise” activity after a period of aggressive inventory reduction (The Honda effect).

The FT reports that Japan’s industrial output bounced back 5.2 per cent in April compared with the previous month, a stronger rise than analysts expected and a boost to hopes. What’s more, with government stimulus spending starting to support demand and manufacturers starting to reverse the drastic cuts to production imposed by a collapse of demand since late last year, the Ministry of Economy, Trade and Industry said surveyed manufacturers expected their output to rise a further 8.8 percent in May and 2.7 percent in June.

However - and there is an important “however” - signs of looming deflation and government data showing that seasonally adjusted unemployment had hit 5 per cent (its highest level for half a decade) suggested that Japan’s economic woes are indeed, far from over.

Even so, the second consecutive monthly rise in industrial output comes amid a distinct lightening of the mood surrounding an economy that suffered record contractions in both of the last two quarters, notes the FT:

The Bank of Japan last week upgraded its assessment of the Japanese economy for the first time in nearly three years, saying exports and production were beginning to bottom out and the effects of state stimulus spending would soon be felt. A supplementary budget clearing the way for the government’s latest Y15,400bn economy boosting package of measures is expected to be enacted today (Friday).

However, (that “however” again) “prospects for final demand for Japanese products in key markets such as the US and China remain unclear and at least some of the current upswing in output is likely to be replenishing inventories depleted by drastic recent production cuts”.

Richard Jerram, economist at Macquarie Securities Japan, notes that the strong April output figures follow sharp cuts to output in the first quarter, due to companies taking production well below final demand in order to burn off excess inventory:

As this process runs its course, output needs to adjust higher in order to stabilise inventories, and this began in April. The trade data on Wednesday gave the first sign of this process, with export volumes up 7.8 per cent from March. Similarly, output rose 5.2 per cent month on month in April and METI is projecting further gains of 8.8 per cent in May and 2.7 per cent in June. As is often the case when the cycle is bouncing, the output data are beating firms’ short-term projections.

Having just seen the worst two quarters on record, quarterly growth in the second quarter of about 10 per cent will be the best on record, according to Jerram, although that will “probably be surpassed” in the third quarter.

Nevertheless, this will still leave output about 15 per cent lower than in the first-half of 2008, before the Lehman shock hit, he adds.

There are two key concerns: First, excess capacity, “with the bounce taking capacity utilisation rates (and profit margins) back only to levels typically seen at the troughs of previous cycles”. Second is that underlying deflation is worsening and set to persist for a prolonged period.

Indeed, the news might all look good today but it’s by no means time to break out the daiginjo sake yet. As Chiwoong Lee of Goldman Sachs writes in a research note on Friday: “We expect production to sustain growth until the autumn, but we note the potential for a downturn later in the fiscal year (starting April) given deteriorating employment conditions and weak consumption”.

Related links:
Japan factory output jumps 5.2% - FT
Japan’s factory output surges most in 56 years - Bloomberg
Japan’s export figures spur optimism - FT
Land of the Rising Sun - closer to the precipice - FT Alphaville
End of the yen’s safe-haven status
- FT Alphaville


Don the libertarian Democrat May 29 17:11
"Bikkuri shimashita (surprise, surprise), as they say in Japan"

In the US we say Holy S--- or J----- C-----!!! Just so you know.

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