MNI INSIGHT: BOJ Sees Q4 GDP Bounce After Temporary Q3 Fall

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials see the contraction of Japan's gross

domestic product in the third quarter as temporary, caused largely by

supply-constrains stemming from natural disasters and focus has turned to how

growth picks up in Q4 as production and supply chains recover, MNI understands.

     The officials are focused on major economic components, such as production,

real export index and private consumption, in or after October, not only to

examine the impact of the trade dispute but also to confirm the underlying

trend.

     Japan's economy posted the first contraction in two quarters in the

July-September period, down 0.3% on quarter, or an annualized -1.2%, weighed by

private consumption, capital investment and exports following recent natural

disasters, preliminary gross domestic product data released Wednesday by the

Cabinet Office showed.

     BOJ economists, along with private-sector economists, had expected GDP to

have fallen, after seeing the weak published real export index and production

data through the quarter.

     --EXPORT INDEX EYED

     The BOJ's focus is now on real exports, as a drop would negatively impact

the real economy, including spillover effects onto capital investment and

production.

     If global demand for Japanese goods, such as cars and capital goods

(excluding transport equipment, which is linked to capital investment overseas)

remain solid, both exports and production will likely rebound in the fourth

quarter, the BOJ believes.

     BOJ officials' analysis suggests the impact of ongoing global trade

disputes on Japan's economy is limited, as domestic capital investment plans in

the current fiscal year remain high, with no particular postponements of planned

investments observed.

     This assessment is consistent with recent interviews with firms conducted

by the BOJ headquarters and its branches, which show not many companies have

been affected by the escalating trade friction -- and even a large number of

those actually affected say the extent has been limited.

     However, BOJ officials remain vigilant over the economic outlook, as many

firms have voiced growing uncertainties regarding the global economy.

     Quite a few firms have reported that it is difficult to gauge the potential

impact of trade dispute because global supply chains are complex. This suggests

firms themselves may not fully grasp the channels and scale of the impact of

trade friction until their orders are actually affected.

     --Q4 GDP VITAL

     If Japan's Q4 GDP doesn't rebound from the weak Q3 data, it would

strengthen BOJ concerns over a turning point towards a weaker economy and BOJ

economists remain focused on whether major economic components rebound in

October, the first month of the fourth quarter.

     However, it is unlikely the BOJ will downgrade the baseline scenario of

economic recovery based on October data alone, as BOJ economists are focused on

quarter-on-quarter moves of the major economic components.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: MMJBJI,MAJDS$,MMJBJ$,M$A$$$,M$J$$$,MT$$$$]