Policy easing in Japan looms

This after June industrial production fell far lower than the consensus forecast of 1.5%.

DBS Group Research noted:

Industrial production unexpectedly dropped -0.1% MoM sa in June, far lower than the consensus forecast of 1.5%. Based on the official surveys conducted one month ago, producers had expected to increase output by more than 2% MoM in June and in July.

The plan of output expansion turned out to be delayed, due to the recent increase in global economic uncertainties. On the quarter on quarter basis, industrial production fell -8.4% saar in 2Q.

Admittedly, output in all industries should have held up better than this, because the construction and the services sectors have been better supported by domestic demand. Still, we estimate that real GDP growth has fallen to about 0% in 2Q, significantly down from 4.7% in 1Q.

Given the slowdown in growth, combined with the persistence of deflation (core CPI: -0.2 % YoY in June) and a strong yen, the Bank of Japan would be under pressure to ease policy further in the next few months, probably as soon as August.