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Economy in Brief

Beyond Japan's IP Rebound...
by Robert Brusca  January 31, 2013

Japan's index of industrial production rebounded strongly in December rising 2.5% after falling by 1.4% in November. Three-month growth rate is now up to an annual rate of 11.6, up sharply from a contracting -7.8% pace over 6-months and up from a -6.4% rate over 12-months.

In the just-completed quarter (preliminarily) the annual rate drop for industrial production is -7.1%. Obviously the fourth quarter will be a poor one for the Japanese economy. But the strong rise in industrial production in December sets a high base at the end of the fourth quarter as a platform for Q1 2013 growth to get off to a good start.

Japan's manufacturing output is roughly on the same path as the overall for mining and manufacturing. Within manufacturing in December consumer goods output rebounded strongly, by 3.7% after posting a -2.5% drop in the previous month. Intermediate goods output also rebounded, rising 1.7% after falling by 1% in November. Investment output was particularly strong, rising by a solid 5.2% after falling 1.4% in November. Over three months consumer goods output, intermediate goods output and investment goods output all are advancing with investment goods leading the pack at an 18.2% annual rate of change. In the quarter, however, consumer goods output is falling at a 20.1% annual rate, intermediate goods output is following it lower at a -0.4% annual rate and even investment goods output is falling at a -6.1% annual rate.

Japan's economy still has a long way to go. Manufacturing output is still only 80.7% of its past cycle peak. Textiles is only 68% of its past cycle peak; transportation is only a 72.2% of its recent peak. While the Japanese auto industry is beginning to dig itself out, it has suffered tremendously. Japan's triple disasters struck; then the sector received another blow from the flooding of some of its facilities in Thailand; then political action in China hit Japanese producers. All of these factors describe conditions that the Japanese auto industry has had to overcome one right after the other.

Looking ahead, Japanese fiscal plans actually foresee less spending as Japan tries to reign in its profligate fiscal past. The new prime minister is putting more pressure on the Bank of Japan to deliver growth.

Increasingly central banks around the world have been given a growth mandate instead of their usual principal inflation fighting mandate. Japan is just the most recent case and probably the most visible and clear-cut case of this happening. The given the recent 'advice' of the new administration for the BOJ to hike its inflation 'objective,' the Bank of Japan has decided that by itself it had determined that a 2% inflation target was better than a 1% inflation target. How fortunate...

In the United States this new emphasis on growth by the central bank takes the form having these programs of quantitative easing layered one top of the other. The Fed has added to them something called 'operation twist'. It has tried to enjoin growth using communication pledges to keep interest rates very low for very long. But what is the most tangible evidence of the Fed's tilt towards growth is that the Fed adopted an objective for the unemployment rate. That clearly puts it as a central bank with two masters: an inflation objective and, essentially, a growth objective.

In United Kingdom the central bank is also engaged in special quantitative easing type programs and also has tried to experiment with directing bank lending, by doing things to encourage banks to lend more to final users of credit.

And of course in Europe the ECB has engaged in all sorts of enhanced lending programs for banks and countries, trying to create plenty of liquidity and especially aimed to prevent runs against countries to stop the speculation about the ultimate demise of the euro zone.

But none of this has solved the basic dilemma of growth. Can Japan now succeed?

Japan Industrial Production Trends
M/M% SAAR% Yr/Yr Qtr
to Date
% of
Seas. Adj. Dec
Yr-Ago % AR Cycle
Mining & MFG 2.5 -1.4 1.6 11.6 -7.8 -6.4 -1.2 -7.1 80.7
Total Industry 2.8 -1.4 1.6 12.5 -6.8 -6.1 -1.2 -6.2 81.4
MFG 2.5 -1.4 1.7 12.1 -7.8 -6.5 -1.2 -7.0 80.7
  Textiles 0.5 -1.2 1.1 1.3 -6.8 -5.2 -0.3 -3.4 68.0
  Transport 7.5 -1.1 1.1 33.5 -15.0 -13.9 13.6 -24.0 72.2
Product Group
  Consumer Goods 3.7 -2.5 0.2 5.4 -11.5 -8.8 1.5 -20.1 72.2
  Intermediate Goods 1.7 -1.0 2.4 12.9 -7.5 -5.3 -5.0 -0.4 80.5
  Investment Goods 5.2 -1.4 0.5 18.2 -1.2 -5.8 5.8 -6.1 78.7
Mining -4.2 6.1 -5.5 -14.5 -21.7 -5.3 7.7 -4.5 80.9
Electric & Gas 5.7 2.1 -0.5 32.8 20.4 1.9 0.4 10.9 94.5
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