Japan production data surprises with 2.7% climb m-o-m in September

Finally, there's some good news.

September production in Japan has surprised on the upside, rising 2.7% m-o-m sa after plunging in August.

According to a research note from HSBC Global Research, the expansion in manufacturing activity was broad-based, with 13 out of 15 industries reporting a pick-up in production.

The report noted that this was due to improving domestic consumption and stronger overseas demand, especially from the US.

Inventories, too, stopped rising for the first time in 5 months. However, the report said that while this is welcome news, it's still too early to conclude that the recovery is a sustainable one: inventory adjustment pressures are still high, and domestic demand remains sluggish.

In line with this, it is expected that IP recovery will be gradual and fragile.

Here's more from HSBC Global Research:

Coming after a string of incredibly weak prints over the summer, the latest manufacturing report comes as a relief. Production rose by a greater-than-expected 2.7% m-o-m sa, following a surprise, 1.9% plunge in August.

With the exception of chemicals and fabricated metals, all industries surveyed by METI expanded production last month, with electronics and transport equipment recording particularly strong jumps.

Output had been trending down since January 2014, when production intended to accommodate rushed demand in the run up to the April VAT hike reached peak levels. But the September IP print offers the first signs that industrial activity has at last bottomed out. Other details of the IP report were also positive.

Thanks to a robust 4.3% m-o-m sa expansion in shipments, manufacturing inventories declined for the first time since April 2014, though it should be noted that inventory levels remain high in several key sectors.

There are also reasons to be optimistic that consumer demand is finally recovering, albeit from a low base: shipments of durable consumer goods jumped 7.7% m-o-m sa in September, expanding for the first time since January 2014.

The pick-up in household spending was also corroborated by the solid, 2.7% mo-m sa expansion in September retail sales. Meanwhile, external demand appears to be improving: real exports rose 1.8% m-o-m sa in September and is up 1.6% q-o-q sa in Q3 14.

The on-going improvement in the PMIs also suggests that economic activity is on the mend. The good news aside, it's difficult to see production picking up strongly over the next few months.

Inventory adjustment pressures are still high and this is likely behind the relatively downbeat manufacturer forecasts for October and November production (a worrying prospect, given that the producer forecasts have tended to be overly optimistic in the first place).

The improvement in the supply side consumption statistics notwithstanding, household spending remains sluggish.

Manufacturing activity will likely continue being supported by improving overseas demand, especially from the US. But with Eurozone growth cooling again, downside risks remain. The worst of the IP downturn appears to be over, but the recovery is likely to prove to be gradual and fragile.

Japan's September IP beat expectations, rising 2.7% m-o-m sa after a sharp fall in August. However, with inventory adjustment pressures still high, and domestic demand sluggish, the recovery in manufacturing activity is likely to remain gradual.