MNI BOJ INSIGHT: Revised Q2 GDP Sustainable; Outlook Unchanged

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan board is expected to maintain its view at

its policy meeting later this month that the current modest economic recovery

will continue, believing that government data released Friday show that

April-June GDP growth was revised down to a more sustainable pace, MNI

understands.

     The sharp downward revision to the Q2 gross domestic product came as no

surprise to BOJ officials or private economists as the preliminary estimate of

capital investment was widely understood to be too strong to be true.

     BOJ officials think economic data released after the bank's last policy

meeting on July 19-20 have supported the BOJ's assessment that the economy

continues expanding "moderately," even though drops in factory output and

household spending in July indicated the economy started the July-September

quarter with a softer tone after growth far above its potential in the previous

quarter.

     Real Q2 GDP was revised down to +0.6% on quarter, or an annualized +2.5%,

from the preliminary estimate of +1.0% on quarter, or an annualized 4.0%. The

downward revision came from domestic demand. Its contribution to overall growth

was revised down to +0.9 percentage point from the preliminary estimate of +1.3

percentage points. Capital investment was revised down to +0.5% on quarter, or

an annualized 2.1%, from the initial reading of +2.4% on quarter, or an

annualized 9.9%. It was the third consecutive quarter-on-quarter rise after

+0.5% in Q1.

     The sixth straight quarterly expansion in GDP followed growth in the

January-March quarter of +0.3% on quarter, or an annualized +1.2%. The recent

annualized growth pace has been above Japan's potential growth rate estimated to

be just under 1%.

     BOJ officials don't think it is necessary to change the current economic

assessment, though they remain vigilant about geopolitical risks caused by

heightened tensions between the U.S. and North Korea over Pyongyang's nuclear

weapon's program and its threat of missile attacks.

     "The economy has been expanding moderately. This picture is unchanged,"

said a person familiar with BOJ thinking. "The economy is strong but consumer

prices are weak. Economic data are supporting the BOJ's recent assessment."

     The person added that there are no economic data to show the impact on the

economy from volatile financial markets caused by geopolitical risks. Safe-haven

buying of the yen could cause concerns that exporter profits would fall and so

slow job creation and wage growth.

     At its Sept. 20-21 policy meeting, the BOJ board is expected to maintain

its assessment that the economy is "expanding moderately" with a virtuous cycle

from income to spending intact, and that capital investment has been "on a

moderate increasing trend."

     Another person also familiar with BOJ thinking said the preliminary

estimate of the increase in capital investment was not a sustainable pace but

that the revised data showed capex remains solid and in line with the recent

gradual uptrend.

     He added that the July data will not prompt the BOJ to change its

assessment of the overall economy and key economic components. August economic

data will start to be released toward the end of the month.

     BOJ economists are focused on the quarterly Tankan business survey for

September, due out on Oct. 2, which covers a wide range of areas from sentiment

and capital investment plans to sales and profits.

     The previous Tankan poll in June showed strong capital investment plans in

the current fiscal year.

     BOJ economists are paying particular attention to how capital investment

plans and business sentiment are revised amid continued uncertainty over global

demand and the impact of geopolitical risks.

--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

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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