MNI INSIGHT: BOJ Looks Longer As Japan's Q2 GDP Revised Lower

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan will look through the downward revision to

Q2 GDP, but remains concerned the economy will weaken in Q4 under the impact of

an Oct. 1 sales tax hike and a continuing global slowdown, MNI understands.

     While Q2 growth was revised lower, front-loading ahead of the tax increase

should boost demand before the economy slows in Q4 and then picks up again early

in 2020, the BOJ expects. Overall, the tax increase should not affect the

economy as much as 2014's sales tax hike.

     The BOJ sees manufacturers delaying implementation of capex due to the

global slowdown, in turn weighing on non-manufacturers and on domestic demand,

until now the mainstay of the economy.

     Officials' greatest concern is the risk that slowing domestic demand

weakens inflation expectations, a key factor underpinning momentum towards the

2% price target.

     Japan's core consumer price index has already slowed compared to BOJ

expectations in July, paving the way for a downward revision of its inflation

assessment at the Sept. 18-19 policy meeting.

     --GDP REVISED DOWN

     The economy rose 0.3% q/q, an annualized +1.3%, in Q2, led by private

consumption and capex, down from preliminary estimates of +0.4% on quarter, or

1.8% y/y. Capital investment, as widely expected, was revised down to +0.2% on

quarter from the preliminary +1.5%. Private consumption was unchanged at growth

of 0.6% on quarter.

     With much to cloud the economy through year-end, the BOJ will look for a

pick-up towards its 0.5-1.0% potential growth rate around Q1 2020, maintaining

the positive output gap -- another key support for maintaining momentum towards

the inflation target.

     The September Tankan business sentiment survey, due Oct. 1, will offer

clues as to how sentiment and businesses have been hit by trade wars and whether

the virtuous cycle between profits and spending is still in place.

--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

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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