MNI ANALYSIS: BOJ Sees Factory Output Intact Despite Weak Q1

By Hiroshi Inoue

     TOKYO (MNI) - Japanese industrial production in January-March posted the

first quarter-on-quarter drop in two years but Bank of Japan officials believe

factory output remains on a moderate uptrend despite what they see as a

temporary slip, MNI understands.

     The index of industrial production fell 1.4% on quarter in the

January-March period, the first drop in eight quarters after rising 1.6% rise in

the final quarter of 2017, preliminary data from the Ministry of Economy, Trade

and Industry (METI) released Friday showed.

     Both BOJ and private economists have pointed out that industrial production

in January-March tends to fluctuate sharply from month to month due to seasonal

adjustments. It is also distorted by METI's annual data revision.

     Friday's data also showed industrial production rose 1.2% on month in

March, coming in stronger than the MNI median economist forecast for +0.5%, but

the combined rebound in March and February (+2.0% m/m) was not strong enough to

lift the first quarter output after the 4.5% drop in January.

     --ANNUAL REVISION DISTORTION

     "Industrial production data were distorted by the annual data revision but

real demand didn't change. It (the BOJ) doesn't need to change its assessment of

the underlying trend of industrial production," a person who is familiar with

BOJ thinking told MNI last week when the government conducted annual revisions

to output data.

     As a result of the annual data revision on April 17, preliminary February

industrial production was revised down sharply to +0.2% on month from +4.1%. On

the new statistical formula, the preliminary figure was further revised down to

being flat while January's 6.8% drop was revised up to the 3.1% fall.

     On the following day, however, METI announced it found mistakes in the data

revision, correcting the month-on-month change in February industrial production

to a 2.0% rise from being unchanged (0.0%).

     BOJ officials believe global demand for Japanese capital goods remains

solid, backed by increasing business investment in equipment.

     Friday's data showed that shipments of capital goods excluding transport

equipment rose 2.9% on month in March, reversing from -1.4% in February.

     Based on its survey of manufacturers, METI projected that industrial

production would rise 3.1% on month in April (revised down from +4.0% forecast

last month) and fall 1.6% in May.

     Adjusting the upward bias in output plans, it forecast production would

rise at a slower pace of 1.4% on month in April. Based on this assumption and if

output is flat in June, industrial production would rise 1.9% on quarter in

April-June, the first rise in two quarters.

     --SLOWER AUTOS, DEVICES

     The year-on-year increase in Japanese exports has decelerated in recent

months after double-digit percentage gains in many months of 2017, but BOJ

officials expect the effect of the slowdown on industrial production will be

limited.

     Production of transport equipment rose 0.7% on month in March, with the

pace of increase slowing from +9.6% in February, METI data showed.

     It is consistent with a slower pace of Japanese automobile exports at +5.4%

on year in March after +15.7% in February.

     The pace of growth in production of electronic parts and devices also

slowed to +2.5% on month in March from +4.7% in February.

     BOJ officials are focused on how METI's April production forecasts for

transport equipment (+4.9%) and electronic parts and devices (+3.1%) will be

revised.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

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