MNI INSIGHT: BOJ Sees Factory Output Points To Modest Recovery

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials think that industrial production is

on a moderate uptrend in line with a pickup in exports and that it will continue

to show solid gains on the back of firm external and domestic demand, MNI

understands.

     Industrial output is a key piece of data for BOJ economists to assess and

predict the pace of the current modest economic recovery as it reflects both

external and domestic demand.

     --FACTORY OUTPUT UP

     Government data released Thursday showed that industrial production posted

the second straight month-on-month rise in November, up 0.6%, coming in stronger

than the 0.1% fall projected by the government and slightly higher than the 0.5%

median forecast by economists polled by MNI.

     The Ministry of Economy, Trade and Industry noted that it was the first

month-to-month rise in a row this year after several months of up-and-down

swings.

     BOJ officials were heartened to see output increases in chip-making

machines, semiconductors and vehicles, as projected by the government last

month.

     --Q4 OUTPUT SEEN UP

     Based on the METI's survey of manufacturers, industrial production is

forecast to rise 3.4% on month in December (revised down from +3.5% projected

last month) and fall 4.5% in January.

     In the October-December quarter, factory output is estimated to rise 2.0%

on quarter after a modest 0.4% gain in July-September and a 2.1% rise in

April-June.

     But adjusting the upward bias in output plans, the METI projected

production would rise at a slower pace of 1.8% on month in December. Based on

this assumption, Q4 factory output would still show a solid 1.5% gain on

quarter.

     The METI upgraded its assessment of industrial production, saying,

"production is picking up." The previous assessment was that production showed

signs of picking up.

     BOJ officials have concluded that November industrial production is

consistent with the November real export index, which supports the BOJ view that

the economy is likely to expand moderately based on balanced domestic and

overseas demand.

     The real export index calculated by the BOJ based on the trade data

released by the Ministry of Finance showed a 5.1% month-on-month rise in

November, for the second straight rise after +2.6% in October.

     The October-November average of the index grew 2.4% over the July-September

quarter, when it rose 1.9% from April-June, indicating Japanese shipments to the

world will continue growing in the whole of the current quarter.

     BOJ officials are convinced that both exports and industrial production

will continue supporting a modest economic recovery in the October-December

quarter onward.

     --INFLATION EXPECTATIONS FOCUSED

     Compared to a steady pickup in factors supporting economic growth, the

year-on-year rise in consumer prices remains slow as companies in general are

cautious about raising wages and retail prices. Labor shortages and higher

materials costs have prompted some firms to raise prices, but investment in

equipment and technology to make operations more efficient is expected to put a

lid on price hikes.

     The next key indicator is inflation expectations held by households in the

BOJ's quarterly consumer confidence survey due out on Jan. 11.

--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

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

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