MNI INSIGHT: BOJ Eyes Q1 Output To Determine Underlying Trend

By Hiroshi Inoue

     TOKYO (MNI) - The pick-up in Japan's industrial production in the fourth

quarter is certainly encouraging for Bank of Japan officials after the weak

third quarter, but they are now focused on Q1 data to see the underlying trend

and whether overseas economic slowdowns are weighing, MNI understands. 

     The bounce back was expected in Q4, as output in the July-September period

was badly hit by a string of natural disasters across Japan. However, officials

note that the Q4 snapback largely only recouped the lost production from Q3, as

companies already operating at close to maximum capacity couldn't expand output.

     --Q4 REBOUND

     The BOJ still views production as on a moderate rising path, but need

confirmation from a solid Q1 to get past the risk that the the economy is at an

inflection point, weighed by growing overseas risks. Officials are focused on

how global demand, mainly in China, evolves in the coming months and whether a

global slowdown in recent months has had a detrimental effect of Japan's

industrial production.

     Industrial output is a key piece of data for BOJ economists, as they use it

to assess and predict the pace of Japan's ongoing economic recovery, as it

reflects both external and domestic demand, mainly capital investment.

     Production rose 1.9% on quarter in Q4, recovering after the earthquake and

weather-impacted 1.3% decline in Q3.

     --DEC OUTPUT SLIPS

     Industrial production fell 0.1% on month in December data released Thursday

by the Ministry of Economy, Trade and Industry (METI) showed, outpacing the MNI

median economist forecast of -0.3%. 

     BOJ officials think that December's drop, like November's, was a reaction

to October's strong gain (+2.9%) and they will focus on the quarter-on-quarter

move in Q1 to examine the underlying trend. December's fall was due mainly to

lower output of production machinery and electronic parts/devices, perhaps

underlining weaker overseas demand. 

     METI maintained its outlook from last month, saying that "production is

picking up moderately." However, they see production dipping in January, before

picking up in February. Adjusting the upward bias in output plans, METI forecast

production would drop 2.3% on month in January and rise 2.6% in February.

     If output is flat in March, industrial production will fall 0.6% in Q1

after the Q4 gain, making it difficult for the BOJ to maintain their assessment

of an ongoing modest pick-up.

--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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