Boston, MA -- (SBWIRE) -- 07/28/2012 -- A combination of government subsidies and a low base effect from March 2011 when the earthquake and tsunami hit, contributed to a 71% year-on-year (y-o-y) increase in Japanese vehicle sales in March, taking Q112 sales up by 47.5%. BMI has revised its forecast for sales of small and mini cars upwards in light of the December announcement regarding subsidies, although we do not expect this current rate of growth to be sustainable throughout the year, particularly as some leading executives have voiced concerns that the fund for subsidies will run out before the deadline of January 2013.

As well as the boost from the incentives on offer, improved supplies of popular models and the low base effect from 2011 have been key drivers of growth in March and will be for the next few months. However, as a recovery in sales had started by Q311, we believe the base effect should be less prevalent in H212 and as such our revisions are still below the current growth rate. Further downside risks in the second half of the year are related to available funds for subsidies. Executives at Honda Motor and Mitsubishi Motors have both said the fund could run dry months ahead of schedule. Nevertheless, we now expect combined sales of mini and small cars to rise 18% y-o-y and standard car sales to grow 8%, resulting in growth of 14.8% for total passenger cars in 2012.

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Production growth has not been quite as rapid as sales and we have maintained our existing forecast for total output to end the year up 11% y-o-y. Output is not subject to subsidies and domestic carmakers have been increasingly shifting production to overseas plants in an effort to reduce their exposure to the strong yen. Improved domestic demand will offer a lift to producers, but will counterbalance a drop in output for overseas markets rather than providing a substantial boost.

While domestic brands look outwards, however, France's Renault will begin importing and selling its cars in Japan through a new company, in what BMI sees as an effort to tap into the growing demand for imported brands in the country, while improving on its own sales outside of the slowing European market. Renault should have a two-fold advantage as European brands are proving popular in Japan, while it also has access to alliance partner Nissan Motor's sales strategy and local knowledge.

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