Japan's production assessment likely to be revised down further

Japan's production has been volatile over the last five months, probably due to the unstable export environment, especially for exports to emerging economies including China.  This may indicate that production is now weakening as a trend. Real exports were also weak in August (-0.3% mom, after -5.1% mom in May, +1.1% mom in June, and +0.7% mom in July). Overseas demand remains unstable, and many companies are unwilling to invest in inventories

"Considering the drop in July, only a small rebound is expected in production for August. August industrial production growth of 0.6% mom is likely, or 1.4% yoy", says Soceite Generale. 

Given the global economic uncertainty, companies have probably become more cautious. As a result, growth in production will probably be much more modest than the Survey of Production Forecasts for August indicates (+2.8% mom). In July's monthly economic report, the government revised down its overall assessment on production from "production is showing weakness in some areas but overall is improving" to "production remains flat". 

In the August monthly economic report, the assessment on exports was revised down to "Exports are in a weak tone recently" from "Exports are almost flat" in July. As the Survey of Production Forecasts for September is showing a drop to -1.7% mom, the overall assessment on production could be revised down further. 

"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 avoids an economic downturn. Although instability still prevails in emerging economies and the global market, there is a high possibility that production will eventually recover. However, the start of the recovery is likely to be delayed", notes Societe Generale.

The BoJ has been slow in revising down its overall assessment on the economy. In the BoJ's September monthly report, the bank explains that "Exports and industrial production have recently been more or less flat, due mainly to the effects of the slowdown in emerging economies."

The government's overall economic assessment, which is explained in the September monthly report as "The Japanese economy is on a moderate recovery, while variation in tempo of improvement can be seen in some areas" may be revised down in October. 

"If this materialises, the BoJ's overall economic assessment may be revised down along with the BoJ's GDP and inflation projections. This will make additional QQE measures by the BoJ more likely", added Societe Generale.