JAPANESE PRODUCTION

"Better than bad" is not "good"

METI Industrial Production data released today registered at 5.24% on a month-over-month basis, the largest increase on a M/M basis in 56 years and the second consecutive increase.  The news bolstered hopes that the worst in now over for Japan as marginally increasing exports and inventory depletion helped get the wheels turning again in several production categories.

 JAPANESE PRODUCTION  - japan2

Unfortunately the glass half full argument appears to us to be undermined by the data.  On a year-over-year basis total production for April still declined by a measure of over 31% with durable goods production declining over 41% -effectively taking absolute production back to levels last seen a generation ago.  Although on a sequential basis output of basic industrial products like fabricated and non-fabricated metals and plastics improved for the month, the continued decrease of output of transportation equipment, heavy machinery and other highly engineered products suggests that Korean factories -helped by a weakened Won, continue to place competitive pressure on Japanese rivals in the higher margin segments of heavy industry.

One of the bright spots to note for April was electronic products, which saw very significant improvement in output levels, with the rippling impact of increasing Chinese demand helping to drive production to a Y/Y decline of 37%, a 10% improvement over March levels and the smallest decline since November of last year. Passenger automotive also saw slight sequential improvement on marginal export recovery.  None of this was sufficient to stem rising job loss as official unemployment registered at 5%, the highest level since 2003 and within half a percent of the highest levels the nation has experienced since 1953.

We view today's data as mixed at best, with some marginal improvement but certainly no indication that a bottom has been found for the land of the rising sun. We fortuitously covered our EWJ short position yesterday, locking in a modest gain ahead of this news, but we continue to maintain a negative bias on the Japanese economy. Unlike the emerging Asian economies, which appear to be showing early signs of real recovery, and South Korea and Taiwan, who are being impacted more directly by "the Client"  and currency inflections, Japan still appears firmly stuck in a rut to us. The only positive catalyst that could sway our near term opinion on Japanese equities would be a weakening Yen.

Andrew Barber

Director