Boston, MA -- (SBWIRE) -- 02/24/2014 -- According to the Japan Automobile Manufacturers Association (JAMA), auto production in Japan rose 10.2% year-on-year (y-o-y) in November 2013 (latest available), to 846,151 units, bringing output for the first 11 months of 2013 to 9,240,365 units, a decrease of 4.2% y-o-y. Total output for 2013 is likely to miss our current estimate of 10.07mn units and we have therefore downgraded our 2013 production growth estimate slightly to 9.7mn units, a contraction of 2.5%.

We remain downbeat on the market in 2014 and forecast a 2.0% contraction in auto production, which will entail another year of declining output for the industry.

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Automakers will enjoy a production boost from now until Q114 as they expand output to meet rising demand in the short term. Due to the planned consumption tax increase in April 2014 from 5.0% to 8.0%, consumers are expected to front load their car purchases before the hike and carmakers will look to increase production to satisfy this demand.

However, we expect domestic sales to take a hit after Q114, once the higher sales tax kicks in. The drop in vehicle demand after the first quarter of 2014 will create massive headwinds for domestic auto production and carmakers will have no choice but to scale back their output for the rest of 2014 in the face of weaker demand (see 'Consumption Tax Increase Poses Risk To Sales', January 10).

Another factor that has influenced our bearish view on domestic auto production is the lack of concrete structural reforms in the economy aimed at encouraging firms to increase their capital investment in the sector. The weak yen has failed to spark a resurgence in domestic manufacturing so far, as the industry is still impeded by the country's high cost base and rigid labour market.

We believe the Japanese economy is still fragile and corporates are also adopting a conservative stance in their outlook despite the recent positive economic indicators (see 'Corporates To Remain Conservative Despite Better Conditions', December 16 2013). We see consumer sentiment taking a hit after the sales tax increase, which will result in a likely retrenchment in private consumption. This will then negate the increase in auto sales experienced by the industry in Q114. Against such a backdrop, we maintain a mildly positive 2014 sales growth forecast of 0.8%, to 5.42mn units.

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