Japan's all-industry output index modestly rises 0.6% MoM in May

2Q GDP could contract -6%.

Japan's all-industry outpux index for May registered a modest rise of 0.6 percent MoM sa, a very mild recovery compared to the -4.6 percent drop in April when the economy was hit by the sales tax hike.

According to a researh note from DBS Bank Ltd., even assuming that output growth can completely recoup the lost ground and rise strongly by 4 percent in June, the economy would have contracted sharply by -5 percent QoQ saar during the entire period of Apr-Jun.

Taking into account the weakness observed in the preliminary data for June, we now see the possibility for the 2Q GDP to contract -6 percent.

Here's more from DBS Bank Ltd.:

Indeed, the recovery of consumer spending from the sales tax hike has remained far from complete.

Department store sales continued to fall by -5.5% YoY in June, a similar rate of decline as -4.7% in May.

Consumer confidence index has bounced up from the bottom seen in April, but still far lower than the peak levels in 3Q13 prior to the announcement of tax hike.

It doesn't help that the recovery in exports has remained very slow.

Exports growth showed little improvement during the first 20 days of June.

Notwithstanding the recent upturn in global electronics sector, the beneficial impact on Japan's exports has not been noticeable, probably reflecting the structural weakness in its trade competitiveness.