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

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