MNI INSIGHT: BOJ Watching Auto Part, Semiconductor Shortages

Bank of Japan officials are increasingly concerned over the economic recovery timetable and may tweak or lower next month's assessments for industrial production and exports as automobile and related industries face continued shortages of semiconductors and parts, MNI understands.

A revision to a previous optimistic view on recovery this year is possible if an expected virtuous cycle from income to spending is disrupted. Earlier this month, Bank of Japan board member Toyoaki Nakamura, in personal comments, said that the recovery path will be slower than the pace seen in July.

Japan has already extended and expanded state of emergency measures to combat the spread of Covid-19.

The BOJ could review the current assessment at the Sept. 21-22 policy meeting that "exports and industrial production have continued to increase steadily" based on recent weak data.

JULY PRODUCTION DOWN

Japan's industrial production fell 1.5% m/m in July for the first drop in two months following +6.5% in June on lower production of automobiles, electrical machinery, and information and communication electronics equipment.

Production by eight domestic automakers fell 2% y/y in July for the first y/y drop in six months in the wake of the auto parts and semiconductor shortages

Several auto companies plan to cut September production because of the continued shortages, with overall automobile production down 3.1% m/m in July, after sharply rising 22.6% in June. Electrical machinery fell 4.7% m/m in July for the first drop in two months following +2.3% in June.

In an indication capital spending is slowing, shipments of capital goods excluding transport equipment fell 0.8% m/m in July following +4.6% in June.

CABINET ASSESSMENT

The government left its assessment unchanged from the previous month, noting "industrial production is recovering" and sees production rising 3.4% (revised up from +1.7%) in August before further rising 1.0% in September.

Adjusting the upward bias in output plans, the forecast production would rise 0.1% m/m in August. Based on this assumption, Q3 production would gain 0.8% q/q for the fifth straight rise.

SHORTAGES NOT IN FORECAST

However, the forecast didn't include the recent shortages of auto-parts because the survey of production forecast in manufacturing showed the figures as of the 10th of month and the production forecast will be revised down.

Industrial output remains a key piece of data to aid BOJ economists to assess the outlook, as it reflects both external and domestic demand, with the BOJ keeping the view that industrial production and exports have increased, see: MNI INSIGHT: BOJ Sees Production Recovery After Toyota Setback.