Japan’s industrial output rose for a third month in May (by 5.9% MoM). The growth could largely be attributed to re-stocking of inventories that saw drastic decline in the wake of the financial crisis. Yet, total inventories fell 0.6 per cent month-on-month in May, according to METI (Ministry of Economy, Trade and Industry).
There still remain significant causes for concern (or even alarm), such as weak end-market demand (both domestic and overseas) and sluggish domestic investment.
However, as Japan is highly cyclical economy, Japanese equity market is expected to perform well with global economic recovery (well, it will recover eventually..), and industrial output is one of the most robust leading indicators for economic activities (while jobless rate typically lags for about 10 months to one year). Thus, I believe there still is upside for Japanese market in mid. term (unless global economy stalls badly in near term).
One caveat: Japan has structural issues such as rigid labour market, and these issues are likely to persist with the lack of political will to reform. Japan will remain 'pure cyclical play' that depends heavily on global demand for its capital goods. So, buy low and sell high with economic cycles - it is not for long term holdings.
