Japanese industrial production dropped sharply in January 2018, Japan’s Ministry of Economy, Trade, and Industry reported last month. Seasonally-adjusted, the IP index fell 6.8% month-over-month from December 2017. Since the country has very little mining sector to speak of, and Japan’s IP doesn’t include utility output, this was entirely manufacturing in nature (99.79% of the IP index is derived from the manufacturing sector).
Various reasons were given for the decline, as they always are, but more importantly it placed a great deal of importance on the February estimate. Was January a one-time aberration, or is there a looming break in trend?
The Ministry released estimates late last week that suggest the break might be more than a one-month transitory anomaly. Industrial Production rebounded in February, but only by 4.1%. That left the year-over-year change (not seasonally-adjusted) as +1.4%. It’s the lowest gain since October 2016, down substantially from what increasingly looks like a mid-2017 peak (+6.5%).
Like so many other economic accounts around the world, Japan’s IP statistic is often misunderstood or disingenuously deployed to sound off on the prospects of a turning point for Japan’s economy. It was that way at the beginning of Abenomics in late 2012, when IP turned positive then, too. Between November 2012 (when the yen first started to fall) and January 2014, a period including the launch of QQE, Industrial Production rose 10.5% in those fourteen months.
Over the prior thirteen months, dating back to October 2011, IP had contracted by almost 8%.
The change in sign was widely hailed as strong evidence that Abenomics was working, and that ultimately it would prove decisive in Japan’s quarter century struggle with its economy. If a weaker yen could so aggressively restart Japan Inc, what couldn’t the BoJ accomplish given enough time?
But by focusing on the plus signs, the degree of Japan’s difficulties was understated if not completely set aside. Even at its peak in early 2014, Industrial Production was still 12% less than it was in February 2008. That 10.5% gain during QQE and early Abenomics wasn’t really all that significant, and in the wider historical context never really appeared to be.