Production cuts to reduce inventory levels wound down in Japan

Inventory growth in Japan was magnified by the April 2014 consumption tax hike. Several sectors unintentionally built up inventories from 2H 2014 through mid-2015. Year-over-year growth in inventories accelerated to 6.2% by the end of March 2015. In particular, there was conspicuous inventory growth in durable goods (mainly automobiles) and in capex-related capital goods.

Data showed that Japan's production last year fell in April-June (-1.4% qoq) and July-September (-1.2% qoq) because weak demand and stagnating exports, which was compounded by pressure from destocking. Growth in inventory gradually slowed as production growth turned negative.

BoFA Merrill Lynch opines that production cuts to bring inventories down to normal levels have just about run their course. Data in November 2015, showed there was a double-digit (16.8% Y/Y) decline in inventories of durable consumer goods, which include automobiles, while the overall industrial segment's inventories fell 0.5% yoy, the first y/y decline since April 2014. Thus there is reduced downside risk to Japan's growth from inventories.