Japan's IP caves in May

In May, the finalized industrial production figures for Japan show that IP has fallen by 7%; the decline in manufacturing is 7.5% month-to-month. Yes, these are month-to-month percent changes; they show declines that are extremely severe. Not only that, but Japan has total industrial production falling for three months in a row. Manufacturing industrial production is falling for two of the last three months.

Over three months industrial production in Japan is declining at a 30.4% annual rate. In manufacturing it's declining at a 30.3% annual rate. Over six months the two series decline at about a 16% annual rate and over 12 months the two series decline by 4% or more. These are severe conditions and very discouraging trends.

Japan's economy is in a very difficult situation right now, experiencing declines in output and a yen that continues to get weaker.

Japan's household spending has been weak, having slipped by 0.5% in May on a year-over-year basis. Rising prices are putting Japanese consumers under pressure and making them cautious.

Japan also continues to suffer the repercussions from the ongoing China COVID-19 curbs. Japan's largest trading partners are China and after that the United States.

The chart at the top (Japan's IP Sequential Growth Rates) is the usual sort of growth rate chart for industrial production. It looks at sequential annualized growth over three months, six months and 12 months in an attempt to identify changing trends. It shows flatness and some weakness from mid-2020 onward (after the big drop in output) amid some rebounding as well as output has been volatile.

The table also shows growth rates over these various periods for industrial sectors as well as the quarter-to-date growth rates by sector. The QTD growth rates are nearly all showing declines in progress – mining is the only exception. I have also included the net growth in industrial production and in various sectors since COVID struck, providing a comparison with levels prevailing in January 2020. And that shows declines everywhere except for utilities.

But there may be nothing that's clearer to revel the situation in Japan than simply plotting the level of the manufacturing industrial production index (see Chart: Japan's Manufacturing Industrial Production). Growth rates have the problem of calculating not simply the change in a series but the change from a base period. Therefore, ‘change' calculations have two elements: one being what's happening recently and the other being what happens to the base for that calculation. Plotting the index directly gets rid of the base effect. As you can see in the chart, it exposes, in this case, a more persistent and disturbing weakness in industrial production.

Japan's industrial production began to weaken in 2018, it slipped in 2019, and it was hit by the COVID crisis in 2020. That knocked industrial production down very sharply-the same as it did globally- and, of course, industrial production rebounded back very strongly from that deep dive. However, after making that recovery, the rebound itself was less than complete and was not lasting. Japan's industrial production has had a very difficult time making any additional headway; in fact, there has been more regress than progress. Industrial output has been volatile and now it's volatile in a declining pattern.

Japan's manufacturing sector shows the sign of being under a great deal of pressure. In fact, the industrial production index shows more weakness and more persisting weakness than even the surveyed PMI indexes from S&P Global. The PMI indexes register ongoing increases in the Japanese manufacturing sector while the industrial production report is astonishingly weaker, showing draconian declines. This sort of difference in two measures purporting to reflect the ‘same thing' makes me wonder. I take IP, a measure that is a ‘real accounting statistic,' that adds up output and controls for inflation, to be an extremely important and reliable gauge. This difference with the PMI reports makes me wonder about what the PMI metric is really gauging. It makes me trust those quick and timely gauges much less.