Japan's industrial production to inch higher to 3%

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According to DBS, December’s industrial production, retail sales and housing starts are due this week. Consensus expects a strong 4.1% (MoM sa) rise in industrial production, up from -1.4% in the previous month. 

The new government’s aggressive push for monetary easing, JPY depreciation and fiscal policy expansion have successfully boosted confidence.

The official survey conducted one month ago showed that producers planned to lift output by 6.7% in Dec12. The actual IP data typically underperformed the official survey results in the past.

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Therefore, we expect a relatively modest growth of 3% in industrial production.

On the demand side, a modest improvement in consumption (proxied by retail sales) is expected. The downward correction in automobile sales (due to the
distortion of government subsidy policies last year) has been completed.

The strong rise in stock market prices since Dec12 should support consumption via the wealth effects.

That said, it remains too early to forecast a virtuous growth path in consumption on the back of a creation of positive inflation expectations. The BOJ conducts surveys on general public’s opinions about price levels only on quarterly basis.

The latest survey (Nov12) showed that public expectations for price levels in the next one year remained little changed.

Meanwhile, it may take a few months to see the boosting impact of JPY depreciation on exports. The real export index remained flat in Dec12, despite the rise in nominal value of exports.

Regarding the fiscal stimulus measures (JPY 10.3trn including JPY 3.8trn on public works), the driving impact on investment will emerge only after the new fiscal year starts in April.