MNI INSIGHT: BOJ Encouraged By Higher GDP But Slowdown A Worry

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials found some comfort in the upwardly

revised Q4 GDP data, but concerns over the slowing global economy still weigh on

their first quarter outlook, MNI understands.

     The slowing China and eurozone economies, along with the dip in overseas

capital investment, are weighing on Japan's exports and industrial production,

BOJ officials admit, but they still think they need more data before abandoning

the view that Japan is still in recovery mode.

     Revised GDP data published Friday showed Japan's economy grew at a faster

pace than initially estimated in the October-December quarter, with business

investment stronger than initially seen. The economy rose 0.5% on quarter, or an

annualized +1.9%, thanks to stronger capital investment, for the first growth in

two quarters following a 0.6% q/q, or an annualized 2.4%, fall in Q3. Capital

investment, as widely expected, revised up to +2.7% on quarter from preliminary

estimate of +2.4%.

--TEMPORARY BOUNCE

     BOJ officials interpret the upward revision of capital investment as

showing corporate spending remained solid through the period, but was somewhat

temporary as the economy bounced back from a string of natural disasters in Q3.

Officials also note that the rebound didn't fully cover the Q3 downturn.

     The slowdown of the global economy, driven initially by a slowing Chinese

economy and spreading into the euro area, is strengthening, clouding the outlook

for Japan's manufacturing base.

     BOJ officials expect both exports and production to remain weak in Q1, with

the focus firmly on how weak global demand weighs on capital investment, a

barometer to gauge the sustainability of the 'virtuous cycle' from profits to

spending.

     January industrial production in fell 3.7% on month in following a fall of

0.1% in December and the production for the first quarter is expected to fall

4.4% on quarter. The first month of the year is always seen as volatile due to

seasonal adjustments and the Lunar New Year holidays, but it makes it difficult

for BOJ economists to get a handle on the Q1 outlook.

--ASSESSMENTS

     BOJ officials have been relatively upbeat on exports in recent months, with

their last assessment showing the nation's global share of world trade on a

rising trend, due in part to an increase in demand for IT-related goods and

capital goods, in which Japan has a comparative advantage."

     But following a sharp fall in the BOJ's real export index in January, down

5.3% on month, ongoing uncertainties over the global economy will have BOJ

officials challenging that view.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: MMJBJI,MAJDS$,MMJBJ$,M$A$$$,M$J$$$,MT$$$$,MX$$$$]