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MNI INSIGHT: BOJ Sees Solid Factory Output; Electronics Eyed

By Hiroshi Inoue
     TOKYO (MNI) - Japanese industrial production posted the first
month-on-month drop in four months in May but Bank of Japan officials see no
need to change their assessment that production is on an uptrend, in line with
the latest government view, MNI understands.
     But at the same time, the officials are keeping a close eye on the impact
of the protectionist U.S. trade policy and retaliatory actions by other major
economies on global demand for Japanese products including electronics.
     At this point, BOJ officials expect industrial production to continue
increasing firmly for now, backed by domestic and overseas demand for vehicles,
production machines and electronic parts.
     They are waiting for June output data, which will show how much production
will rebound in the April-June quarter after what many see as a temporary slump
in Q1, in order to examine the underlying trend.
     Industrial production dipped 0.2% on month in May, coming in stronger than
the MNI median economist forecast of -1.2%, data released Friday by the Ministry
of Economy, Trade and Industry (METI) showed.
     The May decrease was led by lower output of passenger cars, steel products
and electrical machines. It was partly offset by higher output of electronic
parts and devices, production machinery and computers.
     BOJ officials see the May production drop as consistent with the weak
seasonally adjusted real export index, which fell 3.8% on month in May for the
first drop in two months.
     They had expected the output of passenger cars to have fallen in May as the
official output forecast in the previous month showed a 7.0% drop. The output of
transport equipment fell 6.9% on month in May after rising 3.9% in April.
     Based on its survey of manufacturers, METI projected that industrial
production would rise 0.4% on month in June (revised up from -0.8% forecast last
month) and rise 0.8% in July.
     Adjusting the upward bias in output plans, METI forecast production would
slip 0.1% on month in June. Based on this assumption, factory output would rise
1.9% on quarter in April-June, the first rise in two quarters. In January-March,
output slumped 1.3% from October-December, when it rose 1.6%. It was the first
q/q drop in eight quarters.
     Among bright signs, the output of electronic parts and devices -- a key
export item -- rose 3.4% on month (vs. a projected 6.0% fall) in May after
falling 5.7% in April.
     However, BOJ officials will keep a close watch on the developments in
electronic parts and devices as their shipments fell 0.9% on month in May after
-0.7% in April and their inventories rose 4.3% on month following +3.2% in
     METI maintained its assessment, saying industrial production is "picking up
moderately." But it also noted that inventories remained high, rising 0.6% on
month in May, the first rise in two months after falling 0.6% in April. The
index of inventories rose to 113.5, the highest level since 114.2 seen in March
     BOJ officials are also paying close attention to how global demand for
Japanese electronics -- used in various products including smartphones and
computers - will be affected by the protectionist U.S. trade policy.
     The officials don't take the drop in shipments of capital goods excluding
transport equipment (-4.6% on month in May), a leading indicator of business
investment, seriously as the shipments posted high growth in March (+3.0%) and
in April (+2.5%).
--MNI Tokyo Bureau; tel: +81 90-2175-0040; email:
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email:

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