MNI INSIGHT: BOJ Sees Balanced Recovery Despite Slower Q4 GDP

--BOJ Expects Volatile Markets Unlikely To Hurt Recovery Mechanism 

By Hiroshi Inoue

     TOKYO (MNI) - Japan's economic growth in the final quarter of 2017 slowed

from the previous three months but Bank of Japan officials believe that the

modest economic expansion will continue into January-March onward, MNI

understands.

     The economy will remain supported by balanced domestic and overseas demand,

given solid plans by Japanese firms to invest in equipment aimed at easing the

drag from labor shortages as well as the recovery in both industrialized and

emerging economies, BOJ officials think.

     --VOLATILE MARKET IMPACT

     The officials don't expect volatile global financial markets, which have

been caused by the recent plunge in U.S. stock prices, will have a serious

dampening effect on overseas demand and Japanese exports as well as virtuous

circles in the corporate and household sectors.

     However, they will continue carefully watching the risk of investor risk

aversion raising uncertainties and slowing business investment and household

spending.

     Japan's economy for the October-December quarter posted a modest 0.1% rise

on quarter, or an annualized 0.5%, as a rebound in private consumption and solid

capital investment offset the weak net exports and the drop in public works

spending, data released Wednesday showed.

     The eighth straight quarterly expansion in real GDP, the first in 28 years,

followed strong growth of an unrevised 0.6% growth on quarter, or an annualized

+2.2% (revised from preliminary +2.5%), in July-September.

     --CONSUMPTION REBOUNDS

     The slower Q4 GDP growth came as no surprise to BOJ officials, who had said

the high economic growth in Q3 would not be sustainable.

     BOJ officials were encouraged by the rebound in private consumption and the

rise in exports (+2.4% on quarter in Q4 vs. +2.1% in Q3).

     Exports in Q4 GDP were consistent with the real export index calculated by

the BOJ (+2.4% on quarter for the second straight rise).

     Imports in GDP data gained at a faster pace of 2.9% on quarter in Q4,

reversing from -1.2% in Q3 and resulting in a drop in net exports. But this

indicates domestic demand was solid, BOJ officials view.

     Private consumption, which accounts for about 60% of GDP, rose 0.5% on

quarter in Q4, the first rise in two quarter after a revised -0.6% in Q3. It was

slightly stronger than the MNI median economist forecast for +0.4% and pushed up

overall growth by 0.3 percentage point.

     The 0.5% rise in Q4 consumption didn't fully make up for its 0.6% drop in

Q3 but BOJ officials had not anticipated a sharp rebound, judging from the BOJ's

supply-side Consumption Activity Index.

     The index in the fourth quarter was up 0.3% on quarter, compared with -0.5%

in the third quarter.

     The growth in private consumption in Q4 was capped by the recent surge in

fresh food prices and slow income gains but BOJ economists expect the underlying

trend of a gradual pickup in household spending to remain intact.

     BOJ officials don't see the need to change the central bank's latest

assessment that "private consumption is expected to follow a moderate increasing

trend as the employment and income situations continue to improve."

     They think annual wage negotiations between major firms and labor unions in

coming weeks for fiscal 2018 starting in April hold the key to whether private

consumption will increase momentum, which would encourage firms to raise retail

prices and help raise inflation expectations.

     --SOLID CAPEX

     The GDP data also showed that business investment rose 0.7% on quarter in

Q4, as expected, for the fifth straight q/q increase after rising 1.0% in Q3. It

made a 0.1 percentage point contribution to the Q4 GDP growth.

     Capital investment is likely to remain supported by the need to make

operations more efficient in light of serious labor shortages in some sectors

and by a rise in economic growth expectations, the BOJ believes.

--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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