MNI ANALYSIS: BOJ Sees Japan Q2 GDP Rebound After Q1 Dip

By Hiroshi Inoue

     TOKYO (MNI) - Japan's economy contracted in the January-March quarter but

Bank of Japan officials believe it was a temporary blip and expect the economy

to return to a moderate recovery path in the second quarter, MNI understands.

     The gross domestic product (GDP) fell a real 0.2% on quarter, or an

annualized 0.6% in Q1, posting the first contraction in nine quarters, since Q4

of 2015, when it shrank 0.3% on quarter, or 1.2% on an annualized basis.

     The Q1 GDP came in slightly weaker than the median economist forecast for

flat growth, but it was no surprise to BOJ officials, who had expected the

economy to have slowed in the first quarter, judging from weak industrial

production during the period (-1.4% on quarter) and private consumption (-0.4%).

     BOJ officials believe the economy to return to a moderate recovery track in

the April-June quarter, backed by solid domestic and overseas demand. They see

no need to change their assessment that both production and private consumption

are "on a moderate increasing trend."

     --UNDERLYING SPENDING TREND

     Private consumption, which accounts for about 60% of GDP, was flat with a

slight negative bias (-0.0%) on quarter in Q1 after a downwardly revised +0.2%

(+0.5 in the previous estimate) in Q4. The median forecast was unchanged on

quarter, ranging from -0.2% to +0.2%.

     The severe winter weather and high fresh food prices dampened consumption

in Q1. It was also in payback for firm demand for the iPhone X in the previous

quarter.

     BOJ officials are focused on the underlying trend of consumer spending,

which they believe is supported by improving employment and income conditions.

     In fact, the GDP data showed total compensation of employees comprising

gross salaries and benefits rose a real 0.7% on quarter in Q1 after falling 0.2%

in Q4. It continued to post year-on-year gains for three years, up 2.0% in real

terms, and marked the highest increase in over two decades in nominal terms, up

3.2%.

     --HIGH ENERGY COST

     Looking ahead, BOJ officials are paying attention to the negative impact of

rising crude oil prices on the sentiment among firms and households and their

investment and spending plans.

     High crude oil price will increase import costs for smaller companies that

have been hit by rising materials and labor costs. Those firms find it hard to

transfer high costs to retail prices amid sluggish private consumption.

     The price of Dubai crude oil has traded above $70 a barrel, the highest

since November 2014.

     The rise in crude oil prices is immediately reflected in domestic retail

gasoline prices and affect electricity bills with a few months lag and city gas

bills with about seven months lag.

     --EXPORTS SEEN UP

     In other areas of the economy, the BOJ board expects exports to continue

rising based on firm global growth, although the pace of increase in exports

slowed in Q1. Demand for Japanese capital goods remains solid, reflecting

increasing business investment in other countries.

     The GDP data showed that business investment unexpectedly fell 0.1% on

quarter in Q1 (the median forecast was +0.5%), the first q/q drop in six

quarters after rising 0.6% in Q4. But government and central bank officials

believe domestic demand for investing in equipment remains solid amid labor

shortages.

     BOJ officials are focused on how capital investment plans are revised in

the June Tankan business survey due out on July 2.

--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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