MNI INSIGHT: BOJ Sees Japan Econ at Turning Point To Slowdown

By Hiroshi Inoue

     TOKYO (MNI) - Some Bank of Japan officials believe the domestic economy may

be at a turning point toward a slowdown from a sustained, modest recovery track,

which can only be confirmed months later, MNI understands.

     No economic indicators have pointed to a clear decline in domestic or

external demand, leaving BOJ economists to maintain the official view that the

economy is "expanding moderately."

     The BOJ board is also likely to maintain the view at its Sept. 18-19 policy

meeting

     --DIMMER GROWTH OUTLOOK

     However, growing downside risks from the U.S.-China trade dispute and

fragile emerging market economies are clouding the outlook for a continued

Japanese economic expansion that began in late 2012, the BOJ views.

     Among key data monitored by economists at major central banks, the global

trade volumes calculated by the CPB Netherlands Bureau for Economic Policy

Analysis fell an annualized 0.1% in April-June, marking the first drop in nine

quarters after rising 4.9% in the previous quarter.

     --GLOBAL DEMAND KEY

     Japan's modest recovery has been driven by solid global demand for

Japanese-made capital goods and information technology products, and the

manufacturing sector is likely to benefit from continued firm demand.

     But once global growth slows down, the Japanese economy may deviate from

the BOJ's latest baseline scenario because private consumption, which accounts

for about 60% of the total domestic output, remains lackluster amid slow wage

growth and rising costs for daily necessities.

     In its quarterly Outlook Report issued in July, the BOJ projected that

Japan's economy is likely to continue its moderate expansion.

     "Exports are expected to continue their moderate increasing trend on the

back of the firm growth in overseas economies. On this basis, the economy is

likely to continue growing at a pace above its potential in fiscal 2018," it

said.

     --WEAK CAPITAL GOODS

     However, the latest industrial production data have shown signs of a soft

patch.

     Inventories of electronic parts and devices -- key export items to China

and other Asian economies -- rose 3.9% on month in June after rising 4.3% in

May, posting the fifth straight month-to-month increase.

     Production of capital goods excluding transport equipment dropped 3.6% on

month in June, marking the second consecutive month-to-month decline after

falling 1.1% in May.

     In addition, shipments of capital goods excluding transport equipment -- a

key indicator of business investment in equipment -- also showed the second

straight monthly drop, down 1.1% in June after -4.6% in May.

     BOJ economists are paying attention to exports and industrial production

for the July-September quarter for a clearer underlying trend. Industrial output

for July and the government's forecast for August and September are due out on

Friday.

     --SLOW MACHINE ORDERS

     Japan's core machinery orders, which exclude volatile orders for power

generation equipment and ships, slumped 8.8% on month in June for the second

straight m/m decline after -3.7% in May, indicating firms may be slowing capital

investment.

     Orders from overseas, which are outside of the core orders category, also

fell 12.0% on month in June and dropped 1.3% on quarter in April-June for the

second quarterly decline in a row.

--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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