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Industrial production in Japan during the month of July is expected to have risen modestly, following weak demand, coupled with oversupply in inventories. Judging from the available data, the situation of weak demand and inventory oversupply in the manufacturing sector has improved at the start of 3Q, but not significantly.
Japan’s industrial production is expected to post a modest rise of 0.4 percent m/m, on a seasonally adjusted basis. Retail sales are expected to show a relatively notable rise in July, about 1.0 percent. Some temporary factors may have helped to lift consumer spending, such as the retailers’ summer sales campaign that started earlier than usual this year, and the increase in workers’ summer bonuses.
In addition, headline CPI remained in red for the fourth consecutive month in July, at -0.4 percent y/y. CPI, excluding fresh food and energy, which is tracked by the Bank of Japan to measure the underlying inflation, also dropped notably to 0.5 percent in July, down from 0.7 percent in June and the lowest over 16 months.
Overall, production and consumption indicators could allow the BoJ to maintain the view that the economy will enter a modest recovery in 2H16. But the weaker-than-expected inflation data remains a challenge. The central bank has promised to undertake a comprehensive policy assessment at September’s meeting.
Meanwhile, others are concerned that the BoJ may taper the pace of JGB purchases, remove the timeline for the 2 percent inflation target, and even abolish the negative interest rates. A combination of monetary easing and reforms in the current policy framework is thereby expected. In light of the high degree of uncertainties surrounding the BoJ’s next review, market volatility would remain high over the next one month.
