Overview: A flood of economic data has been released overnight. The main message is that the Japanese economy continues to deteriorate at an unprecedented pace but there are signs that the economy will soon start to bottom out albeit at very depressed level. Japan's main problem is an extraordinary external demand shock and for that reason the development in exports and industrial production will be decisive for a turnaround in the Japanese economy. Industrial productivity continued to plunge at a record pace in January and it is likely to continue into February as Japan's manufacturers struggle with excessive inventories. The scale of the decline in industrial activity has been unprecedented. In February industrial production will probably be close to 40% below its peak reached during the spring of 2008 and back at 1983 levels! At the moment, it looks as if GDP will contract by more than 2% q/q in Q1 09 and Japan's GDP will contract by more than 4% for 2009 as a whole. We will release our revised GDP forecast late next week.
- Industrial production in January plunged 10.0% m/m (consensus: -10.0%) following a 9.8% drop in the previous month (see chart 1). This is the third month in a row with a record plunge in industrial production. According to production plans (usually reliable for the following month), Japanese manufacturers in February plan to cut production by another 8.3% m/m (revised down from previously only 4.7% planned cut in production.) Meanwhile, there are signs that industrial activity is starting to bottom out. Inventories have finally started to decline (-2.0% m/m). However, the inventory/sales ratio continues to increase and inventory adjustment still has a long way to go if shipments of goods remain at the current depressed levels (see chart 1). According to production plans, manufacturers currently plan to increase production slightly in March (+2.8% m/m). Signs that industrial activity is starting to bottom out were confirmed by a slight increase in February in the Nomura/JMMA manufacturing PMI to 31.6 from 29.6 driven by an increase in the new orders component from 17.8 to 20.6.
- The unemployment rate in January surprisingly dropped to 4.1% (consensus: 4.6%) from 4.3% in the previous month. We should be careful not to read too much into it. In Japan the unemployment rate is not a very reliable indicator for the state of the labour market. The more reliable job-to-applicant ratio declined more than expected in January (see chart 4). We believe the overall trend in employment growth remains down, as indicated by the sharp drop in the employment component in the Nomura/JMMA manufacturing PMI (see chart 5). At the moment, it looks like the negative impact from the decline in employment more than offsets the positive impact on real incomes from lower inflation on private consumption. Household spending in January declined more than expected by 5.9% y/y (see chart 6). Private consumption will continue to contract in Q1 but we expect to see a slight improvement in Q2, where there should be a positive impact from fiscal stimulus.
- Consumer prices in January came in broadly in line with expectations. CPI excluding fresh food came in slightly above expectations at 0.0% y/y (consensus: -0.1% y/y) after increasing 0.2% y/y in the previous month. Core CPI inflation (excluding energy and food) declined to -0.2% from 0.0% in the previous month, underlining that deflation might become an issue in Japan with the output gap opening up massively and the labour market getting weaker and weaker.
Impact: There has been no major market impact from the overnight data. Despite the dismal economic data, JPY has actually strengthened overnight as some believe that the recent weeks' weakening of JPY has been overdone (currently USD/JPY is trading at 97.8). That said, the extraordinarily weak state of the Japanese economy has started to weigh on JPY: although we are likely to see a correction in the short run we believe the main trend the next year will be a weaker JPY.
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