MNI INSIGHT: BOJ See Exports Q1 GDP Key, China Slowdown Worry

--China Slowdown Seen Impacting Exports, Although May Bounce In January

--BOJ Economists Eye Q1 GDP Data To See Underlying Trend

By Hiroshi Inoue

     TOKYO (MNI) - Although heartened by the modest growth rebound in Q4, Bank

of Japan officials remain cautious over the outlook as downside risks remain,

particularly concerns over the strength China's economy, MNI understands.

     With Q3 2018 seeing the economy dip in the wake of a string of natural

disaster, before recovering somewhat in Q4 despite slowing global demand, BOJ

insiders want a closer look at the Q1 2019 data to eye the underlying trend.

     Japan's economy posted growth of 0.3% on quarter, or an annualized 1.4%,

thanks to higher private consumption and capital investment, preliminary gross

domestic product data released Thursday by the Cabinet Office showed. Although

encouraging, the Q4 recovery did not fully offset the downturn seen in Q3, when

growth fell a revised 0.7% q/q.

     Both capital investment and private consumption bounced back in Q4 as

expected by the BOJ, but focus at the central bank has shifted to how both

exports and industrial production have been affected by the slowing global

demand.

--CHINA SLOWDOWN

     BOJ economists now see the impact of the China slowdown appearing in the

data, with weak net exports challenging their view that exports have been on an

increasing trend. Net exports of goods and services made a negative 0.3

percentage point contribution to GDP -- the third consecutive quarterly negative

contribution.

     A key point now for the BOJ is how weak exports to the wider Asian region,

including China, are offset by exports to advanced economies -- although a

slowdown in Europe in Q4 and early Q1 may not help.

     Exports are expected to have risen in January due to a pick up in demand

from China before the Chinese New Year, but reverse in February as the early Feb

holiday keeps much of China's industry closed for at least a week.

     The Ministry of Finance will release the January trade data on Feb. 20.

--SOLID DOMESTIC DEMAND

     One bright note BOJ officials highlight is that the volatility in global

financial markets in the fourth quarter and the ongoing global trade disputes

appeared to have only limited impact on both corporate and household sentiment.

     Private consumption, which accounts for about 60% of Japan's GDP, rose 0.6%

on quarter in Q4, marking the first quarterly rise in two quarters after an

unrevised -0.2% in Q3, while business investment rose 2.4% on quarter in Q4 (the

median forecast was +2.0%) rebounding from -2.7% in Q3.

     There is a concern in the BOJ that if exports lose momentum, companies may

delay capital investment, increasing the risk that Japan's modest recovery is at

an inflection point.

     Those officials will closely eye capital investment plans in fiscal 2019,

available in the BOJ March Tankan business sentiment survey due out on April 1,

although the June revisions will be a more accurate reading.

--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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