Japan's industrial production to climb a measly 0.3%

Will it fully recover in 2H?

According to DBS, the major macro data for March are due this week. Industrial production is likely to show a modest rise of 0.3% MoM sa. The real economic performance has remained relatively weak if compared to the strong financial market movement.

Here's more:

Export volumes underperformed export value. Actual consumer spending also underperformed consumer confidence. Construction investment is faring relatively well, aided by government spending.

Nonetheless, the overall growth trend is up rather than down. A stronger recovery is expected in 2H asthe boosting effects of a weaker yen and a higher stock market become more pronounced and global demand also improves.

The Bank of Japan last Friday raised the FY2013-FY2014 inflation forecasts to 0.7% and 1.4% (up from 0.4% and 0.9%, excluding consumption tax hike), and projects 1.9% inflation in FY2015 (close to the 2% policy target).

The FY2013-FY2014 GDP forecasts were also upgraded (2.9% and 1.4%, up from 2.3% and0.8%). The BOJ made sanguine assumptions about a success of monetary easing to boost long-term inflation expectations and lower real interest rates, effectiveness of fiscal policy expansion, and progress in structural reforms.

In our view, it remains premature to expect a sustained rise in inflation expectations and a formation of virtuous cycle of rising prices and rising demand.

Fiscal tightening will be unavoidable and comprehensive structural reforms won’t be easy to push through. The longer term outlook in 2014-2015 remains challenging.