MNI INSIGHT: BOJ Eyes FY19 Q1 Data For Trend; Risks Building

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials will need to see data for the fourth

quarter and the first quarter of 2019 to confirm the uptrend for the underlying

economy, all as they become more attuned to growing downside risks, MNI

understands. 

     With Japanese growth expected to bounce back in the fourth quarter from the

dip seen in Q3, BOJ economists are waiting on data for the first quarter of 2019

to confirm the underlying trend.

     Officials will focus to see whether both exports and industrial production

extend the uptrend seen up to the second quarter of 2018.

     "A quarter-on-quarter rise in the fourth quarter is necessary but it isn't

enough to confirm that exports and industrial production return to the previous

uptrend. The focus is the degree of their rebound," a person familiar with BOJ

thinking told MNI.

     That person also said this quarter needed to see a gain of more than double

the third quarter dip to confirm the previous uptrend, even before considering

the next quarter.

     Japan's industrial production fell 1.3% q/q in the third quarter , with at

least a 2.6% rise needed in the fourth quarter. Japan's real export index fell

1.9% on quarter in the third quarter and at least 3.8% bounce is required, the

BOJ views.

     The fourth quarter has got off to a solid start. October industrial

production rose 2.9% on month for the first rise in two months and the real

export index rose 6.2% on month, also for the first rise in two months.

     --RISKS BUILDING

     BOJ officials expect Japan to return to a moderate recovery path in the

fourth quarter -- unless the economy is hit by another shock, such as

weaker-than-expected slowdown in the global economy.

     Domestically, the officials are concerned over the risk that recent stock

price volatility weighs on corporate and household sentiment, impeding spending,

which in turn will undermine the virtuous cycle and slow growth.

     Increasing uncertainties over global demand amid ongoing trade disputes is

clouding the outlook for Japan's economic recovery as it increases downside

risks to the global economy.

     Speaking to legislators Thursday, BOJ Governor Haruhiko Kuroda said ongoing

trade disputes are the biggest risk facing Japan's economy and the central bank

continues to monitor developments.

     BOJ officials still maintain the baseline scenario that the domestic

economy is expected to expand moderately, with no signs or indications of a

significant worsening for the major economic components.

     Those officials expect Japan's economic growth to slow in fiscal 2019 and

2020 due to stock adjustments of high capital investments but they expect

continuing growth above Japan's potential rate.

     The board's median forecast for real economic growth in both fiscal 2019

and 2020 is 0.8%, with Japan's potential growth rate estimated by the BOJ to be

in the range of 0.5 to 1.0%.

     Capital investment will not play a lead role boosting the economy in the

coming years, with solid external demand and private consumption underpinning,

BOJ officials view.

     --MARKET VOLATILITY

     Should volatile financial markets strike the global economy, the BOJ would

likely face reviewing their central scenario and possibly consider conducting

further monetary policy to support the economy. But the BOJ is running out of

options to help lift the economy and officials would have to consider adjusting

their policy framework to deal with resulting downside risks to the economy.

--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

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