Japan IP falls 3.3% m-o-m sa in June

Recording sharpest drop since March 2011 quake.

June IP was much weaker than expected, falling 3.3% m-o-m sa--the sharpest drop since the March 2011 earthquake.

According to a research note from HSBC, with domestic demand still depressed after the VAT hike and real exports underperforming, it's not surprising that manufacturing activity has remained lackluster.

But the scale of the June drop is worrying, the report said.

Further, the on-going build-up in inventories points to prolonged weakness in Japanese manufacturing activity.

Here's more from HSBC:

The contraction in June IP was broad-based, with all industries recording a sequential drop in production.

Given their weight in the index, declines in transport equipment and general machinery contributed the most to the slowdown.

But the 9.0% m-o-m sa plunge in IT & communication electronics equipment (ICE) also weighed heavily on the headline number.

Since hitting a cycle peak in January 2014, ICE production has been on astonishing slide.

According to the Ministry of Economy, Trade and Industry (METI), the June contraction was due to a fall in desktop computers, cell phones and fixed communication devices.

Clearly, some of the weakness is cyclical and reflects "payback" from earlier front-loaded demand.

Still, it's hard not to conclude that Japan's ICE industry is also in the midst of a structural decline.

Beyond the softness in ICE production, manufacturing activity will likely remain subdued in the coming months.

Domestic demand has yet to recover in earnest from the VAT hike.

Meanwhile, real exports are still stalled.