MNI INSIGHT: BOJ Unconvinced by Strong GDP; Q2 Moves In Focus

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan is unconvinced by the strength of the

rebound in Q1 GDP, which was driven by a rise in net exports following a hefty

fall in the imports of both goods and services, underlining weak domestic

demand, MNI understands.

     GDP unexpectedly rose 0.5% on quarter in Q1, or an annualized +2.1%, thanks

to the stronger net exports, preliminary data released Monday by the Cabinet

Office showed.

     Private consumption however, which accounts for 60% of Japan's economy,

fell 0.1% in the quarter, after rising a revised +0.2% in Q4. Business

investment fell 0.3% q/q in Q1, reversing some of the gains seen in Q4, but

beating the MNI survey that forecast a fall of 2.2%.

     With consumer spending constrained in Q1, there is a growing concern that

the Japanese government's increased sales tax expected later this year will have

a further dampening effect on demand.

     --LOOK FOR EXPORT BOUNCE

     For now though, officials will focus on whether both exports and industrial

production bounce back in the April-June quarter, keeping the economy on what

the BOJ still views as a recovery path.

     Despite outright exports of goods and services falling in the period, net

against imports they contributed 0.4 percentage point to total domestic output,

slightly above expectations, for the first positive contribution in four

quarters after pushing Q4 GDP growth down by 0.3 percentage points.

     BOJ analysis showed that the decline in exports can be explained almost

entirely by the negative contribution of factors specific to Asia and IT-related

goods/capital goods. Past trends show that adjustments in the cycle for

IT-related goods takes an average of 5-6 quarters to complete and with the

current slowdown having started in Q2 2018, the bank views the current

adjustment may hit bottom in the second half of this year.

     --ASIA KEY

     How China's stimulus measures play out are becoming a key focus for the

BOJ, as it is key to a pick up in both the Greater Asia region and the prospects

for Japan's exporters -- although officials aren't expecting exports to recover

in the near term.

     The BOJ's Outlook Report released on April 25 said, "Exports are projected

to show some weakness for the time being," adding that "industrial production is

likely to be affected by the slowdown in overseas economies for the time being."

--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

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