Japanese manufacturing production fell 2.8% in July, 11.7% below the December 2000 peak level. Shipments declined 3% and inventories dropped only 1.3%. Compare this with the United States where production and shipments were roughly steady and inventories declined. Market conditions are significantly worse in Japan and will be a drag on U.S. manufacturers for the rest of this year. Japanese manufacturers reacted to rising inventory last fall much more slowly than U.S. manufacturers.
Components and systems have had the biggest declines. July production has fallen from the December peak-a 55% drop for resistors, 45% for capacitors, 39% for semiconductors, 28% for printed-circuit boards, 27% for cell phones, and 26% for connectors.
Semiconductor manufacturers reduced finished product inventories 5.5% in July; telecom manufacturers cut stocks 19.7%. Serious inventory balancing is under way, but at least several more months of depressed production is needed to get stocks back in balance.
The current weakness is not entirely cyclical. A significant share is from the secular decline in market share due to high Japanese costs. The high value of the yen also contributes to the market share loss. This will not be regained when the economy recovers.