MNI BOJ STATE OF PLAY: Solid Q3 GDP Seen After Data Honed

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan economists are cautiously analyzing a strong

real export rise in August and an expected slip in consumer spending during the

month, keeping their assessment that the economy will show a solid but slower

expansion in July-September when bumps in data are evened out.

     The real export index calculated by the BOJ based on the trade data

released by the Ministry of Finance on Wednesday showed a relatively high 3.0%

gain on month in August after rising 1.7% in July, but this does not make BOJ

officials overly optimistic about the strength of external demand.

     Details of the real trade indexes are due out Monday, but the rebound in

July and August is believed to have been led by firmer shipments of smartphone

parts and other information technology goods after what both BOJ and government

officials called a temporary slump in April-June.

     The real export index fell 0.5% on quarter in April-June after rising 2.9%

in the first quarter, hit by weak exports of IT goods, which slumped 4.2% in Q2

after a 4.4% gain in Q1.

     "The weak export index in the second quarter was in payback for the strong

gain in the first quarter, and so was expected. Shipments of IT-related goods

fell in the second quarter due to higher inventories," a person who is familiar

with BOJ thinking said.

     The person added that the real export index of IT goods rose 2.3% on month

in July, as BOJ officials had expected, after rising 1.0% in June.

     BOJ economists expect exports to continue rising in the July-September

quarter due to firmer demand for high-tech goods as well machinery used in

capital investment.

     In the policy statement to be released after the BOJ's two-day board

meeting ending Thursday, the bank is expected to leave its assessment of

exports, concluding that they "have been on an increasing trend."

     In April-June GDP data, net exports -- exports minus imports -- trimmed 0.3

percentage point off overall economic growth, partly offsetting the positive 0.9

percentage point contribution from domestic demand.

     Japanese exports rose 18.1% on year in August, coming in stronger than the

MNI median economist forecast of +14.7%, MOF data showed. It was the ninth

straight year-on-year increase after +13.4% in July, reflecting a gradual pickup

in global growth. The increase was led by higher shipments of automobiles, auto

parts and semiconductors.

     The August trade balance came to a surplus of Y113.6 billion, wider than

the MNI median forecast for a Y101.3 billion surplus. It was the third

consecutive monthly surplus, following July's Y421.7 billion surplus and

compared with a deficit of Y34.6 billion in August 2016.

     On a seasonally adjusted basis, exports rose 1.2% on month and imports also

rose 1.2%, the MOF data showed.

     On the domestic front, private consumption is expected to slow after

surging 0.8% on quarter in April-June and pushing up the overall GDP growth by

0.5 percentage point. Q2 GDP grew 0.6% on quarter, or an annualized 2.5%, far

above the economy's potential growth rate, estimated to be around 1% at best.

     The BOJ's Consumption Activity Index for August due out on Oct. 6 is

expected by BOJ economists to have weakened after a 0.3% month-on-month rise in

July and a solid 1.0% quarter-on-quarter gain in April-June.

     This has been inferred from sentiment data while economists await August

household spending due on Sept. 29.

     News of North Korea's threat to launch a ballistic missile toward the U.S.

territory of Guam led to some cancellations of overseas holiday tours, hitting

Japanese travel agencies, according to the latest Economy Watchers' Survey

conducted from Aug. 25 to Aug. 31.

     Long rainy days in August also dampened the service sector, including

operators of theme parks and golf courses.

     The BOJ's consumption indicator reflects a wide range of sales and

supply-side statistics on goods and services and helps capture the short-term

consumption trend, and it has a close correlation to final gross domestic

product figures.

     BOJ economists think it is necessary to average the performance of its

consumption index in July and August to ascertain the underlying trend of

consumer spending, which accounts for about 60% of the total domestic output.

     In its post-meeting statement due Thursday, the BOJ board is expected to

maintain its assessment that "private consumption has increased its resilience."

     The board will also leave its view on industrial production unchanged,

saying it is "on an increasing trend."

     BOJ economists are not so discouraged by a slip in factory output in July

because they think it was caused mainly by a temporary drop in vehicle

production.

     Industrial production fell 0.8% on month in July for the first

month-on-month drop in two months following a 2.2% gain in June.

     The government survey showed that industrial production is expected to rise

6.0% on month in August and fall 3.1% in September.

     Adjusting the upward bias in output plans, the government projected that

production would rise only 1.4% on month in August. On this assumption, the

level of production in September is likely to be flat or slightly lower than in

August.

     Another person who is familiar with BOJ thinking said that August

production due out on Sept. 29 should show a rebound in line with a gradual

increase in exports.

--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; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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