Japan's industrial production to confirm a weak trend

September industrial production is expected to fall by 0.5% mom, after a decline of 1.2% mom (-0.4% yoy) in August. Production has been volatile over the last six months (-0.8% mom in March, +1.2% mom in April, -2.1% mom in May, +1.1% mom in June, -0.8% mom in July and -1.2% mom in August), probably due to the unstable export environment, especially for exports to emerging economies including China. If September production is as weak as anticipated, it will be the third consecutive month of negative growth, confirming its weakness as a trend. 

In the October Monthly Economic Report by Cabinet Office, the government's assessment on exports and production were both explained as showing "a weak tone recently". Overall assessment on the economy is explained as "The Japanese economy is on a moderate recovery, while weakness can be seen in some areas". This was a downward revision from "The Japanese economy is on a moderate recovery, while slowness can be seen in some areas". This corresponds to the assessment shown when the BoJ implemented additional QQE measures in October 2014. Similarly, production in Q2 2014 (-3.1% qoq) and Q3 2014 (-1.3% qoq) were showing negative growth for two consecutive quarters while production in Q2 2015 (-1.4% qoq) and Q3 2015 are also showing the same situation. 

Overall, assessment by the Ministry of Economy, Trade and Industry (METI) on production was "Industrial production fluctuates indecisively" as of October 2014 while the latest assessment as of September 2015 is explained as "Industrial Production has weakened", indicating a weaker assessment this time. Once the September production figure confirms that the production trend is weak, the BoJ is expected to implement additional QQE measures at the 30 October meeting. At the same time, the BoJ will revise down its assessment on GDP and inflation in its semi-annual report. 

The production trend in 2015 depends on how strongly exports pick up on the back of a US economic recovery, and also on the extent to which the Chinese economy will avoid an economic downturn. Although instability still prevails in emerging economies and the global market, there is a significant possibility that production will ultimately recover. However, the start of the recovery is likely to be delayed. Survey of Production Forecasts is showing firm growth of 4.4% mom in October, but this could be revised down substantially. However, considering that inventories are not much of a concern, the production trend is not anticipated to tumble. As long as the government and the BoJ keep the policy stance firm, movement towards a complete exit from deflation is intact.