MNI INSIGHT: BOJ Sees Output Pickup, Watching Trade Row Impact

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials expect an uptrend in industrial

production to continue on solid overseas and domestic demand, watching how it

will recover in August onward after a possible slump in July caused by the

severe rainfall that killed over 200 people and caused a temporary supply chain

breakdown, MNI understands.

     But at the same time, they are watching for any signs of U.S. trade

disputes hurting global demand. They are analyzing whether the recent drop in

durable goods production in Japan reflects slower capital investment in other

countries.

     BOJ officials see no need to change their latest assessment that industrial

production is on an uptrend despite a larger-than-expected drop in June factory

output.

     Industrial production fell 2.1% on month in June, coming in weaker than the

MNI median economist forecast of -0.4%, data released Tuesday by the Ministry of

Economy, Trade and Industry (METI) showed.

     But production rebounded 1.2% on quarter in April-June for the first rise

in two quarters after -1.3% in January-March, indicating the economy was back on

a modest growth track after a temporary slump in Q1.

     --JULY DROP EXPECTED

     BOJ economists have received information that supply chain networks in

Japan are recovering gradually and that damage to business equipment in

southwestern regions is limited. However, massive flooding and mud slides caused

serious damage to vegetable and fruit farms.

     Industrial production is estimated by BOJ economists to have posted a third

straight monthly drop in July due to a major transportation breakdown and

wide-spread damage to social infrastructure in the disaster zone caused by

severe rainfall in the month.

     METI's survey shows industrial production is expected to rise 2.7% in July

and gain a further 3.8% in August.

     But adjusting the upward bias in output plans, METI forecast production

would rise just 0.2% on month in July. Based on this assumption and if September

output were flat, production would fall 0.1% on quarter in July-September, the

first drop in two quarters.

     BOJ economists noted that the government survey was based on responses by

July 10, immediately after the heavy rainfall, which means the survey didn't

reflect the full impact of the disaster.

     They are also paying attention to how U.S. trade rows will impact global

demand, and thus Japan's exports and production.

     --SOLID ELECTRONIC PARTS

     BOJ economists are encouraged by continued solid demand for electronic

parts and devices as well as cars and trucks.

     Production for electronic parts and devices rose 2.7% on month in June

following a 3.4% rise in May while that of transport equipment rose 0.2% in June

after falling 5.9% in the previous month.

     Production of transport equipment posted only a slight gain but its

shipments rose 5.6% in June following -9.0% in May. As a result, transport

equipment inventories fell 8.5% in June after rising 5.1% in May.

     --CAPITAL GOODS DROP

     On the downside, BOJ economists are keeping a close watch on production of

capital goods (excluding transport equipment), which fell 3.6% in June for the

second straight month-on-month decline after -1.1% in May, +1.8% in April, +1.4%

in March.

     They are examining whether overseas demand for capital goods excluding

vehicles, which are used for capital investment, have been affected by the

protectionist U.S. trade policy and retaliatory actions by China and other major

economies.

--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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