Industrial Production Declines in Japan in November

Industrial production in Japan fell by 1.3% in November; manufacturing alone also saw industrial production falling by 1.3% in November. For total industry, production is accelerating as 12-month growth is falling by 1.2%, but growth over six months rises at a 3.7% annual rate, and growth over three months rises at a 4.3% annual rate. For manufacturing, it's almost the same picture with output down by 1.3% over 12 months, but then the annual rate of expansion jumps to 5.6% over six months, but subsequently backtracks slightly to a 5.2% annual rate over three months. The picture from manufacturing is really the same for total industry except for some decimal points; it shows that manufacturing output goes from declining over 12 months to expanding at a strong pace over three months and six months.

The strengthening trend in output is not reflected in each of the three main manufacturing sectors of consumer goods, intermediate goods, and investment goods. Consumer goods do show a general improvement. There is a rebound with growth of 1.8% over 12 months, jumping strongly to rise 15.7% at an annual rate over three months. But the in-between measure, over six months, has industrial production falling at a 4.7% annual rate. Still, the bottom line for consumer goods output is that output has accelerated over three months compared to 12 months. For intermediate goods, there's an accelerating progression as growth falls by 0.8% over 12 months, advances at a 5.2% annual rate over six months, and then accelerates further to a 6% annual rate over three months. Investment goods go in the opposite direction. The sector does not quite stand up to become a sequential deceleration, but it's close to that with output falling by 5.4% over 12 months, then output falls, at a very elevated -15.9% annual rate over six months, then the decline slows but it is still a decline in double digits at a -11.7% at an annual rate over three months. All of this helps to confuse the true trend for industrial production in Japan. Investment goods seem to be suffering from the global growth malaise.

The chart at the top shows that if we plot growth rates for Japan of 12-months, six-months, and three-months, over the past six months or so, output on most of these gauges has been consistently declining or weakening. That chart concentrates on comparing three-month growth to three-month growth, six-month growth to six-month growth and 12-month growth to 12-month growth. The growth rates connect the dots (literally) along the same growth horizons treating them as time-series rather than jumping between these tenors to compare three-months to six-months to 12-months. The time-series graphic presentation of the growth data makes developing trends seem weaker than they appear in the table that compares growth across tenors.

In the quarter to date (QTD), there has been strong revival for overall industrial production that is growing at a 7.5% annual rate two months into the fourth quarter; manufacturing is growing at an 8.2% annual rate QTD. Consumer goods output two months into this quarter is growing at an 18.4% annual rate with their intermediate goods growing at an 8.2% annual rate; investment goods output is contracting at a 6.8% annual rate.

Industrial production in Japan has been struggling after COVID struck. The far-right hand column calculates aggregate growth from today's index to the index that prevailed in January 2020; for all the industry and sector measures in the table, output is lower than it was in January 2020 except for the utilities, electric and gas. That is net lower output over a period of nearly three years for most industries and sectors.

Japan is logging slow growth, and this is expected to continue as Japan is also under a demographic implosion that sees population growth steadily shrinking. Japan's important trading partners are having mixed performance as China is under a great deal of pressure and even has some concerns about the development of deflation there. Japan’s second largest trading partner is the United States, where growth has performed better but where a number of economic gauges are not performing well at all. In particular, manufacturing is performing extremely poorly. Japan does not benefit as much when U.S. growth is sequestered and its services sector as is currently the case. Japan and the U.S. are linked most closely through their goods sectors and through investment channels. In addition to these complications, there are geopolitical issues of importance in Europe, the Middle East, and in Asia.

Japan is in the process of putting together a relatively strong quarter of growth. From the standpoint of industrial production, as this quarter draws to a close, production appears to be weakening and the December result could undercut the current assessment of Q4-strength considerably. Apart from aggregate strength, Japan shows weakness in its capital goods sector. Away from manufacturing, mining output grows in the quarter to date at a 3.7% annual rate. Utilities output from electric and gas utilities shows a decline at a 27% annual rate, a strange development during a quarter where overall economic growth is so strong. Japan's economy continues to spin off signs of erratic behavior. Japan is still posting a relatively strong number for industry, but the quarterly picture is still developing.