MNI INSIGHT: BOJ Sees Modest Q1 Output Pickup Despite Jan Drop

By Hiroshi Inoue

     TOKYO (MNI) - Japan's industrial production fell sharply in January from

the previous month but Bank of Japan officials expect factory output to maintain

the modest pickup trend in the January-March quarter based on solid domestic and

overseas demand, MNI understands.

     The index of industrial production posted the first month-on-month drop in

four months in January, slumping 6.6% in to a seasonally adjusted 99.5 (100 in

2010), a 12-month low. This followed a 2.9% rise to 106.5 in December, the

highest in more than nine years.

     The January output came in weaker than the MNI median economist forecast of

a 4.2% decrease on month but it still rose 2.7% on year.

     --DISTORTED OUTPUT DATA

     January output data tends to be distorted by seasonal adjustments and BOJ

economists believe the 6.6% drop was largely caused by this statistical

distortion. Industrial production has been showing month-on-month declines in

most of the odd months since January 2017.

     However, BOJ economists do think January output was "a bit too weak," even

considering the distortion, and therefore they will keep a close watch on the

underlying trend.

     The decrease in January was led by lower output of passenger cars and

general machinery and electronic devices, as largely expected.

     The production of transportation equipment -- which tends to be strongly

affected by seasonal adjustments -- plunged 14.1% on month in January (vs. +6.4%

in December).

     However, BOJ economists are somewhat encouraged by a projected rebound in

the output of transport equipment in February, up 13.6% on month before slipping

3.3% in March. The projected February increase was revised up from the 9.8% rise

forecast last month.

     BOJ officials analyze the demand for Japanese-made automobiles in the key

U.S. market has lost some steam after sharp gains last year, but at the same

time they expect solid global demand for capital goods used in investment in

equipment to continue in the first quarter, supporting Japanese exports and thus

GDP growth in Q1.

     --Q1 SEEN DOWN

     Based on its survey of manufacturers, METI projected that industrial

production would rebound 9.0% on month in February (revised up from +5.7%

forecast last month) before falling 2.7% in March.

     However, adjusting the upward bias in output plans, METI forecast

production would rise at a slower pace of 4.7% on month in February. Based on

this assumption, industrial production would fall 2.5% on quarter in

January-March, the first drop in eight quarters.

     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.

     BOJ economists are keeping a close eye on developments in the output of

automobiles as well as electronic parts and devices, which is influenced by

overseas demand.

     In January, the real export index rose 2.1% on month and the real index for

capital goods exports gained 4.0%, according to BOJ data.

     By contrast, the METI production data showed that shipments of capital

goods excluding transport equipment fell 5.3% on month in January, marking the

first drop in four months after rising 3.8% in December.

--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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