In July's monthly economic report, Japan government revised down its overall assessment on production from "production is showing weakness in some areas but overall is improving" to "production remains flat".



As producers have been cautious regarding inventory investment in the past, the level of inventories is not a major problem. Therefore, production is not expected to be tumbled. Inventories accumulated from February to April by +1.8% but in May, stood at -0.8% mom.

Consumption in the US is recovering and China's growth momentum is bottoming out. Against this backdrop, both exports and production will show firm growth after July, assumes Societe Generale. The production trend in 2015 depends on how strongly exports pick up on the back of US economic recovery.



In addition, domestic demand should become firm thanks to aggregate wage demand. Therefore, a gradual strengthening in production trend momentum is expected. Once companies start to forecast a continuous increase in prices and costs, they will probably shift their stance from reducing inventories to increasing inventory investment regardless of any further improvement in inventory management. In addition, in the event of full employment and a further rise in costs due to yen depreciation becoming a large risk, it would not be rational for companies to reduce inventories. This is because it would be more profitable for companies to increase inventory in the current (cheaper) cost environment, added SocGen.



"As inventories are currently decreasing, this implies that yen depreciation has not been an obstacle to companies incurring increased costs. As corporate growth and inflation rate forecasts are both rising, the attitude to inventories is gradually shifting from one of inventory adjustment to one of inventory investment. Therefore, production is likely to strengthen ahead", according to SocGen.