MNI INSIGHT: BOJ Sees Balanced Recovery Despite Weak Q3 Spend

--Japan Govt Offl: Not Yet Sure About iPhone Demand in Q4

By Hiroshi Inoue and Max Sato

     TOKYO (MNI) - Despite the weakness in private consumption shown in the

third quarter GDP data released Wednesday, Bank of Japan officials continue to

believe that Japan's economy will expand moderately starting in the fourth

quarter, backed by balanced domestic and overseas demand, MNI understands.

     The slower Q3 GDP growth came as no surprise to BOJ officials, who expected

private consumption to have slumped due to the effects of bad weather and in

reaction to unusually high spending in the second quarter.

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

quarter in Q3, the first drop in seven quarters after a revised +0.7% in Q2. It

was weaker than the MNI median forecast for -0.3% and pushed down overall growth

by 0.3 percentage point.

     The long stretch of rainy days and typhoon weather hurt tourism and

restaurants while replacement demand seen in April-June for automobiles

purchased with government fuel efficiency subsidies faded in July-September.

     In addition, orders for the latest smartphone models were slow, as some

customers waited for the November release of the iPhone X instead of rushing to

buy the iPhone 8, which went on the market in September.

     Whether private consumption will show a clear rebound in the final quarter

of 2017 is uncertain, government officials said. The economy seems to have made

a mixed start to Q3, with big typhoons in October hurting some sales and lower

temperatures boosting demand for winter clothing.

     "We don't know yet whether people waited for the iPhone X and are actually

placing high orders for the latest model," a government economist told MNI.

     "We will have to see whether imports of smartphones are rising in

October-December after slumping in July-September and whether household spending

and retail sales are rebounding in the current quarter," he said.

     "We will also have to see whether domestic demand is peaking out during the

current sustained economic recovery, and whether the pickup in household income

means things are getting better from here or we are seeing the peak in lagging

indicators," the official said.

     Weak income growth is holding back consumption, but BOJ economists don't

expect the underlying trend of household spending -- excluding temporary

fluctuations -- to weaken in coming months.

     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."

     Japan's economy for the July-September quarter posted a modest 0.3% rise on

quarter, or an annualized 1.4%, as a rebound in net exports more than offset the

slump in consumer spending.

     The preliminary GDP data also showed that business investment rose 0.2% on

quarter in Q3, as expected, for the fourth straight q/q increase after rising

0.5% in Q2. It made zero contribution to the Q3 GDP growth, however.

     The usual pattern for the rest of the fiscal year is for capital investment

plans to tend to slow as companies push back some of their plans into the next

fiscal year starting in April.

     But capital investment is likely to remain supported by labor-saving

investment in response to labor shortages and a possible rise in economic growth

expectations, the BOJ believes.

     BOJ economists will monitor whether the expected slowdown in capital

investment plans is within the historical range or weaker than usual through the

bank's next quarterly Tankan business survey due out on Dec. 15.

     The GDP data show net exports of goods and services made a positive 0.5

percentage point contribution to total domestic output, in line with

expectations (the MNI survey median forecast was +0.4 percentage point).

     It was the first positive contribution in two quarters after pushing down

Q2 GDP growth by 0.2 percentage point. Shipments of electronics parts and

devices as well as automobiles led Q3 exports to a 1.5% rise on quarter after a

0.2% drop in Q2 and a 1.9% rise in Q1.

     BOJ officials expect the export uptrend to continue as demand for

Japanese-made IT-related goods and capital goods used in factories around the

world is likely to remain firm given the continued rise in the global economy.

     The officials are not overly concerned about the drop in the BOJ's real

export index in September, which was caused by what they see as temporarily weak

demand for automobiles and related goods as well as IT-related goods. Demand for

electronics parts for smartphones is picking up, the BOJ believes.

     The weak exports of IT-related goods in September didn't mean that global

demand has weakened, BOJ officials argue.

     The latest BOJ data show that the real export index fell 5.4% on month in

September. The index for automobiles and related goods dipped 7.2% and that for

IT-related goods was down 5.7%.

     Despite the September drop, the real export index for the third quarter was

up 1.9% on quarter, the first rise in two quarters.

     Industrial production is expected to fluctuate month to month in tandem

with developments in exports and domestic demand, but factory output is likely

to continue posting solid gains for the time being on the back of the recent

increase in demand at home and abroad, BOJ officials believe.

     Industrial production fell a seasonally adjusted 1.1% in September, but

posted the sixth consecutive quarterly gain, up 0.4% on quarter in Q3 after a

gain of 2.1% in Q2.

     The government has forecast factory output will rebound 4.7% on month in

October before slipping 0.9% in November. Adjusting for the upward bias in

output plans, the government projected production would actually rise a more

modest 2.4% on month in October.

     The BOJ's focus remains on how a continued economic recovery affects

consumer prices and whether inflation expectations, whose improvement has

paused, will rise in the coming quarters.

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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