MNI INSIGHT: BOJ On Edge After Further Fall In Production

By Hiroshi Inoue

     TOKYO (MNI) - August's renewed slowdown in industrial production did little

to soothe nerves at the Bank of Japan that the pick-up in the global slowdown

will be delayed, dimmming the economic outlook at home and risking a slowing in

momentum to higher inflation, MNI understands.

     The BOJ will re-examine economic and price developments at the October

policy meeting, increasing he the possibility it will consider conducting

further easing, having already stated it "will not hesitate" in taking

additional easing measures if there is an increased risk to losing the momentum

toward achieving its price target.

     Industrial production fell 1.2% on month (vs the MNI median forecast of

-0.5%), reversing July's 1.3% gain, weighed by lower production for machinery

and motor vehicles, and iron, steel and non-ferrous metals.

     Against that, production for electronic parts and devices rose, indicating

the adjustment of IT-related goods -- a sector closely watched by BOJ economists

- may have troughed.

     Shipments of capital goods excluding transport equipment, another key focus

for the BOJ, rose 2.4% in August following a 0.2% gain in July and a 5.0% fall

in June.

     The bounce back from June's fall was tepid, as capital investment

decelerated overseas amid the sustained global slowdown and the weak August data

may prompt the BOJ to lower its assessment that industrial production has been

"more or less flat."

     Production has been weighed by weak exports in recent months, but found

some support from demand linked to capital investment aimed at improving

efficiency amid labor shortages at home and BOJ economists continue to focus on

whether that domestic demand remains solid despite the overseas weakness.

     --DOWNGRADE

     The government lowered its assessment on industrial production, noting it

has been "in a weak tone recently." The previous view was "production is marking

time." Production is seen rising 1.9% (revised up from -1.6%) in September

before falling 0.5% in October. Adjusting the upward bias in output plans, METI

forecast production would rise 0.3% on month in September.

     Based on this assumption, production for the July-September quarter would

fall 0.9% q/q, after a gain of 0.6% in Q2 and a fall of 2.5% in Q1.

     The BOJ remains cautious, though, as the realization ratio - the real

amount of the previous month in the current time's survey divided by the

estimated amount of the current month in the previous time's survey -- remained

weak in August, down 3.3% following down 1.3% in July following falls of 2.2% in

June and 2.5% in May.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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