MNI INSIGHT: BOJ Sees Factory Output Economy Risks After Q1

Bank of Japan officials remain sceptical of an industrial production recovery into the year as the war in Ukraine and resulting high energy costs put up another roadblock even as they welcomed a slight February rebound led by auto output that managed to work around continued semiconductor supply-chain gaps and pandemic restrictions, MNI understands.

Industrial output is a key piece of data for BOJ economists to assess and predict the pace of the current modest economic recovery as it reflects both external and domestic demand, with a forecast for strong gains in March also welcomed.

But BOJ officials expect that chances of a smooth economic recovery after Q1 are in doubt as the most recent forecast did not fully include the shortage of semiconductors and slowing overseas economies, MNI understands.

As well, BOJ officials expect auto manufacturers plant to trim production in the coming months because of the supply-restrictions and related businesses are more cautious on capital investment plans than before, see: MNI SURVEY: BOJ March Tankan Survey To Show Weaker Corp Views.

The BOJ March Tankan survey is due out on Friday and more data on the economic performance of regions in Japan will come from the quarterly branch managers’ meeting on April 11.

Bank officials particularly cited high energy costs on why companies are cautious about implementing capex, see: MNI INSIGHT: BOJ Policy Could Pivot With Changing Price Views. The government shares the same concerns.

Further ahead, March trade data due on April 20 will be a key touchstone on production. The BOJ’s latest assessment is that “Japan’s exports and industrial production have continued to increase as a trend.” Using the wording “as a trend” reflects the BOJ's caution on potential weakness ahead.