Japan's June industrial production likely to show modest growth

Japan's overseas demand remains unstable, and many companies are unwilling to invest in inventories. June industrial production is likely to show modest growth of 0.1% mom.

In July's monthly economic report, the government revised down its overall assessment on production to "production remains flat". As producers have been cautious regarding inventory investment in the past, the level of inventories is not a major problem. Therefore, production is not expected to tumble.

According to Societe Generale,

• Consumption in the US is recovering and China's growth momentum is bottoming out. Against this backdrop, both exports and production will show firm growth after July. 
• The production trend in 2015 depends on how strongly exports pick up on the back of US economic recovery", says Societe Generale. 
• In addition, domestic demand should become firm due to aggregate wage demand. Thus, a gradual strengthening in production trend momentum is expected.
• In the event of full employment and a further rise in costs due to yen depreciation becoming a large risk, it would not be rational for companies to reduce inventories.
• As inventories are currently decreasing, this implies that yen depreciation has not been an obstacle to companies incurring increased costs. 
• The attitude to inventories is gradually shifting from one of inventory adjustment to one of inventory investment. Therefore, production is likely to strengthen ahead.