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 monthly surges on record in April industrial output – putting Japan on track for near record output growth in the second quarter. 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 much stronger rise than analysts expected and a boost for the diehard optimists. 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” in the FT’s report – 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 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”.
In his daily newsletter “The Blah”, KBC’s inimitable Japan-watcher Jonathan Allum sums it all up in typical style:The jump of 5.2% is the biggest such rise for 56 years. Not only is it higher than the consensus forecast of 3.3% reported by Bloomberg but it is higher than any of the 30 different estimates that Bloomberg collated. If the companies themselves are to be believed,you ain’t seen nothing yet since they are expecting a further increase of 8.8% MoM in May and 2.3% in June. The bad news is that these estimates do not have a very good track record and have, in general, tended to be too optimistic. On the other hand, a month ago the companies themselves were “only” expecting a 4.3% jump.
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. Looking ahead, there are two key concerns, he says: 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, Japan’s news might look pretty good today but it’s by no means time to break out the daiginjo sake. 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”.
The last word, however, should go to KBC’s Allum:Since overt optimism on the Japanese economy has long been illegal, the media response to today’s releases is predictably mealy-mouthed. Bloomberg allows itself the very milquetoast “Recession Eases” although it does reproduce a rather good quotation from Glen Maguire of Soc Gen – “this is not so much a green shoot as a green tree”. I wish I had said that………This is, of course, not the view of the irredeemably ursine FT…
Which leads us – or rather, Allum – to the very last word, for all those Monty Python fans out there:If the Dismal Scientists are correct (and who am I to doubt their collective wisdom?), the recession is not easing. This is not a reduction in the rate of decline, a second derivative recovery. This is the real deal. This is an ex-recession. It has ceased to be. It has kicked the bucket, shuffled off its mortal coil, run down the curtain and joined the choir invisible.
Related links:
Japan factory output jumps 5.2% – FT
Japan’s factory output surges most in 56 years - Bloomberg
Monty Python – Dead parrot – YouTube
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