Japan industrial output heading for downturn
Saturday, 13 February 2010
Stanley White
Demand growth from Japan's two most important export markets is peaking, putting at risk Japan's longest period of industrial expansion in more than a decade.
Indeed, some analysts suggest that the sector is facing a downturn or even recession in coming months as the rapid run up in demand following the global financial crisis drops off.
New orders figures from the United States and China have a strong correlation with Japanese output, so a slowdown in demand growth would weigh on Japanese companies and their shares.
To be sure, analysts are not suggesting Japan is about to tip back into a long and damaging economic recession.
But some analysts, including Seiji Shiraishi, chief economist at HSBC Securities in Tokyo, say historic data points to a possible industrial contraction as early as this month.
The view underlines expectations that after an initial burst of growth after the global financial crisis, Japan's economy is set to slow down in the first half of 2010 -- a concern for a government heading towards likely upper house elections mid year.
"Indexes on U.S. manufacturing and new orders have reached historic peak-out levels," Shiraishi said. "Output could fall in February when compared to the previous month and decline in April-June on a quarterly basis. China's potential is much bigger than in the United States, but some deceleration is expected in coming months."
Japan endured its longest recession in decades in the global financial crisis as world trade crumbled. It returned to growth in the second quarter of 2009 and data on Monday is expected to show that GDP rose the most in almost two years in the fourth quarter as the economy rebounded.
Industrial output rose for 10 consecutive months up to December, the longest streak of gains in more than 12 years, fuelled by a revival of global trade as governments spent trillions of dollars in stimulus packages.
The U.S. new orders index produced by Institute for Supply Management hit 65.90 in January, while China's new orders index in the HSBC purchasing managers' report hit 61.84 in January.
A reading above 50 indicates expansion, while a reading below 50 shows contraction.
Both indexes have historically peaked around 60, after which they start to decline and over time fall below 50.
Historically, Japanese output hasn't necessarily fallen when U.S. and Chinese new orders growth has eased.
But a fall is likely to start soon this time because Japan's output rebound from a 26-year low marked last year was too quick to be sustainable, economists say.
"The peak in industrial production is nearing," said Seiji Adachi, senior economist at Deutsche Securities in Tokyo. "The decline is likely to come quicker than in previous business cycles. Last year's quick recovery was due to exports and a durable goods boom in the domestic economy, but these factors are fading."
Adachi expects industrial output to fall 0.5 percent in the first quarter and 1.3 percent in the second quarter of this year.
Moves by China, Japan's biggest export market, to tighten monetary conditions add to expectations of reduced demand from the emerging economic power.
The moves have rattled global markets, which see them as a precursor to full-blown tightening of monetary policy and reduced demand.
"It's possible China will tighten policy too much as they adjust the speed of their economy, and their tightening has hurt Japan's factory output before," said Yasuo Yamamoto, senior economist at Mizuho Research Institute in Tokyo.
Japanese shares hit 15-month highs in January on growing optimism over a global economic recovery. But they have fallen alongside other markets on recent scares, such as euro-zone debt woes, which have raised doubts about the sustainability of the global recovery.
The sharp rise in output boosted exporter shares more than the broader market.
The Topix sub-indexes for autos and electronics , which include big exporters such as Nissan Motor Co and Sony Corp, rallied 53 percent and 35 percent respectively in 2009. The benchmark Nikkei average rose 19 percent.
The sub-indexes have edged back 8 percent and 2 percent so far this year.
They had also drawn support from new Finance Minister Kaoto Kan, who in his first press conference on Jan. 7, said he wanted the yen to weaken more and that many companies are hoping the dollar will rise to 95 yen .
But currency markets are not co-operating. After falling to more than 93 per dollar a day after Kan's press conference, the currency has been rising steadily and is now at 90, making it tougher for exporters to compete on price on world markets.
Over the past five years, the Topix index for autos had a correlation coefficient of 0.81 with industrial production, while the electronics sub-index's correlation coefficient was 0.87.
Such declines would underline government concerns about the risks of the overall economy slipping back into a recession, especially given industry's central role in the economy.
Most analysts do not expect another economic recession but a fall in industrial output could trouble Prime Minister Yukio Hatoyama, who is hoping for positive economic signs to win votes ahead of an upper house election expected in July. — Reuters
Demand growth from Japan's two most important export markets is peaking, putting at risk Japan's longest period of industrial expansion in more than a decade.
Indeed, some analysts suggest that the sector is facing a downturn or even recession in coming months as the rapid run up in demand following the global financial crisis drops off.
New orders figures from the United States and China have a strong correlation with Japanese output, so a slowdown in demand growth would weigh on Japanese companies and their shares.
To be sure, analysts are not suggesting Japan is about to tip back into a long and damaging economic recession.
But some analysts, including Seiji Shiraishi, chief economist at HSBC Securities in Tokyo, say historic data points to a possible industrial contraction as early as this month.
The view underlines expectations that after an initial burst of growth after the global financial crisis, Japan's economy is set to slow down in the first half of 2010 -- a concern for a government heading towards likely upper house elections mid year.
"Indexes on U.S. manufacturing and new orders have reached historic peak-out levels," Shiraishi said. "Output could fall in February when compared to the previous month and decline in April-June on a quarterly basis. China's potential is much bigger than in the United States, but some deceleration is expected in coming months."
Japan endured its longest recession in decades in the global financial crisis as world trade crumbled. It returned to growth in the second quarter of 2009 and data on Monday is expected to show that GDP rose the most in almost two years in the fourth quarter as the economy rebounded.
Industrial output rose for 10 consecutive months up to December, the longest streak of gains in more than 12 years, fuelled by a revival of global trade as governments spent trillions of dollars in stimulus packages.
The U.S. new orders index produced by Institute for Supply Management hit 65.90 in January, while China's new orders index in the HSBC purchasing managers' report hit 61.84 in January.
A reading above 50 indicates expansion, while a reading below 50 shows contraction.
Both indexes have historically peaked around 60, after which they start to decline and over time fall below 50.
Historically, Japanese output hasn't necessarily fallen when U.S. and Chinese new orders growth has eased.
But a fall is likely to start soon this time because Japan's output rebound from a 26-year low marked last year was too quick to be sustainable, economists say.
"The peak in industrial production is nearing," said Seiji Adachi, senior economist at Deutsche Securities in Tokyo. "The decline is likely to come quicker than in previous business cycles. Last year's quick recovery was due to exports and a durable goods boom in the domestic economy, but these factors are fading."
Adachi expects industrial output to fall 0.5 percent in the first quarter and 1.3 percent in the second quarter of this year.
Moves by China, Japan's biggest export market, to tighten monetary conditions add to expectations of reduced demand from the emerging economic power.
The moves have rattled global markets, which see them as a precursor to full-blown tightening of monetary policy and reduced demand.
"It's possible China will tighten policy too much as they adjust the speed of their economy, and their tightening has hurt Japan's factory output before," said Yasuo Yamamoto, senior economist at Mizuho Research Institute in Tokyo.
Japanese shares hit 15-month highs in January on growing optimism over a global economic recovery. But they have fallen alongside other markets on recent scares, such as euro-zone debt woes, which have raised doubts about the sustainability of the global recovery.
The sharp rise in output boosted exporter shares more than the broader market.
The Topix sub-indexes for autos and electronics , which include big exporters such as Nissan Motor Co and Sony Corp, rallied 53 percent and 35 percent respectively in 2009. The benchmark Nikkei average rose 19 percent.
The sub-indexes have edged back 8 percent and 2 percent so far this year.
They had also drawn support from new Finance Minister Kaoto Kan, who in his first press conference on Jan. 7, said he wanted the yen to weaken more and that many companies are hoping the dollar will rise to 95 yen .
But currency markets are not co-operating. After falling to more than 93 per dollar a day after Kan's press conference, the currency has been rising steadily and is now at 90, making it tougher for exporters to compete on price on world markets.
Over the past five years, the Topix index for autos had a correlation coefficient of 0.81 with industrial production, while the electronics sub-index's correlation coefficient was 0.87.
Such declines would underline government concerns about the risks of the overall economy slipping back into a recession, especially given industry's central role in the economy.
Most analysts do not expect another economic recession but a fall in industrial output could trouble Prime Minister Yukio Hatoyama, who is hoping for positive economic signs to win votes ahead of an upper house election expected in July. — Reuters