MNI INSIGHT: BOJ Sees Solid Q4 Growth, Watching Weak CPI

--See Several Bright Spots in October Industrial Production Data

By Hiroshi Inoue

     TOKYO (MNI) - In light of October data, Bank of Japan officials predict the

underlying moderate economic expansion, led by balanced domestic and overseas

demand, will continue in the fourth quarter, overcoming the drag on consumption

and output caused by bad weather, MNI understands.

     Stormy weather led to a lower-than-expected rise in factory output,

delaying both imports of parts and materials as well as exports of finished

goods. The bad weather also dented retail sales and core household spending.

     But the continued tight labor supply, as seen in rising job offers, has

created a gradual uptrend in real household income, which is expected to provide

support to consumption going forward.

     BOJ economists traditionally focus on developments in industrial

production, and how production is being influenced by changes in domestic demand

and overseas demand, to gauge the outlook for overall economic activity.

     BOJ officials detected several bright spots in the October industrial

output data, including projections for a continued rise in production of

transport equipment as well as electronic parts and devices. These categories

have led the recent pickup in Japanese exports.

     Production of transport equipment is expected to rise 2.1% on month in

November and 3.4% in December, showing that companies see continued firm

overseas demand for Japanese vehicles.

     Production of electronic parts and devices is also expected to increase, by

6.5% on month in November and 7.0% in December, indicating demand for Japanese

parts used in smartphones, namely the iPhone series, remains solid.

     However, BOJ officials admit that inflation has been slow to rise as

companies increase efforts to raise productivity to offset labor shortages and

absorb higher costs.

     In the longer term, officials expect upward inflation pressure to rise

gradually as companies reach the limits of their ability to boost productivity,

which in turn will raise wages and transfer higher costs to retail prices.

     In the near term, however, BOJ officials are worried about weak prices for

food (including processed food) and durable goods because the pass-through from

the yen's past appreciation has been very slow, making it likely that more

downward pressure from this factor -- in the form of lower import costs -- will

counter higher energy prices to some extent.

     Data released Friday show consumer inflation is marking time even though

producer prices have been rising steadily.

     Japan's national average core CPI (excluding fresh food but including

energy prices) rose 0.8% on year in October, the 10th straight year-on-year

rise, after +0.7% in September and August.

     National CPI data show goods prices excluding fresh food rose 1.7% on year

in October following +1.5% in September. The pace of increase in overall goods

prices plunged to 0.4% year-on-year from 1.5% the previous month due to lower

vegetable prices compared to a spike last year.

     Excluding upward pressure from energy prices, the underlying price trend

showed no improvement. CPI excluding fresh food and energy (the core-core CPI)

rose 0.2% on year in October, the same pace as in September and August.

     Total national CPI rose just 0.2% on year in October, slowing sharply from

+0.7% in September but BOJ officials are not alarmed because the drop was due

mainly to an unfavorable base effect caused by higher fresh vegetable prices

seen last year.

     Prices for fresh vegetables plunged 25.0% on year in October after falling

3.8% in September.

     BOJ concerns over the sustainability of domestic demand triggered by weak

import data in October eased somewhat due to a rebound in industrial production.

     Industrial production rose 0.5% on month in October, coming in much weaker

than the 2.0% median forecast by economists polled by MNI. The increase was led

by production of electric machinery and transport equipment but decreases in

chemicals as well as petroleum and coal products limited the overall output

gain.

     Chemical producers and refineries had many routine shutdowns for safety

checks. Production and shipments were also hit by three typhoons. One in the

Philippines and Vietnam delayed imports of parts and raw materials to Japan

while two more hit Japan, delaying exports to North America.

     BOJ officials see no need to change their view that industrial production

is likely to show firm increases in the near term on the back of higher demand

at home and abroad.

     But they are paying attention to whether factory output continues to rise

as projected by manufacturers and whether imports continue increasing.

     Based on the government's survey of manufacturers, industrial production is

projected to rise 2.8% on month in November (revised up from -0.9% projected

last month) and gain a further 3.5% in December.

     Based on these projections, production in the October-December quarter is

estimated to jump 3.6% on quarter after a modest 0.4% gain in July-September and

a 2.1% rise in April-June.

     But adjusting the upward bias in output plans, the government projected

production would fall 0.1% on month in November while stating the 3.5%

projection should be intact. Based on this assumption, Q4 factory output would

still show a solid 1.6% gain on quarter.

--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

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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