MNI INSIGHT: BOJ More Cautious About Export, Output Growth

By Hiroshi Inoue

     TOKYO (MNI) - Weak industrial production for July is making Bank of Japan

officials slightly more cautious about the outlook for a modest but sustained

economic recovery but the central bank is unlikely to downgrade its overall

economic assessment at this point, MNI understands.

     Sluggish export and production data released this month showed the economy

made a slow start to the July-September quarter after posting solid growth in

April-June, led by stronger consumption and business investment.

     But the BOJ board may not downgrade its assessment on exports and factory

production at its Sept. 18-19 policy meeting, before seeing more indicators for

Q3 growth due in the next couple of months.

     --BOJ MORE VIGILANT

     At the same time, BOJ economists are becoming more vigilant against

near-term downside risks, analyzing whether the sluggish production has been

caused by a decline in domestic or global demand.

     The government on Wednesday warned that external demand is slowing amid the

U.S.-China trade dispute but left its overall view for August unchanged, saying

for the eighth straight month that the economy is "recovering moderately."

     In its monthly economic report, the government downgraded its view on

exports for the first time in three years, saying the pickup in exports is

"marking time," instead of its previous assessment that exports were "picking

up."

     The volume of Japanese exports dropped 1.7% on month in July, hit by slower

shipments of passenger cars to the U.S. and a slip in Asian demand for

electronic parts and devices, Cabinet Office data in the report showed.

     --BOJ WATCHING Q3

     BOJ economists want to see how industrial production will evolve in August

and September to a clearer underlying trend for the third quarter, which has

been hit by heavy rains and severe heat waves that caused a temporary supply

chain breakdown and mixed retail sales.

     Industrial production fell 0.1% on month in July, coming in weaker than the

MNI median economist forecast of +0.3% and posting the third straight

month-on-month drop after -1.8% in June, data released Friday by the Ministry of

Economy, Trade and Industry (METI) showed.

     Heavy rains that hit southwestern Japan caused a parts supply shortage and

a distribution network breakdown, leading to a decline in output of transport

equipment and production machinery.

     Passenger car exports to the U.S. and Europe also slumped while shipments

of steel products to the U.S. slowed in light of a higher import duty levied by

the Trump administration.

     --GOVT LOWERS ASSESSMENT

     The weak data prompted METI to downgrade its assessment for the first time

in six months, saying, "While production is picking up moderately, there are

signs of weakness in some areas." Previously, it simply said output was picking

up moderately.

     Both government and BOJ economists had expected some factories to make up

for the lost production caused by heavy rains in southwestern regions early in

the month that killed more than 200 people and destroyed social infrastructure.

     Japan's production has been mainly driven by production machinery and other

goods used for capital investment at home and abroad.

     --SOFT CAPEX SIGNS

     However, Friday's data indicated that firms are becoming cautious about

implementing capital investment plans.

     Production of general, production and business machines fell 2.1% on month

in July for the second straight drop following -3.9% in June.

     Production of capital goods excluding transport equipment, a key capex

indicator, dropped 1.2% on month in July for the third straight fall after -3.6%

in June.

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

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

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