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By Hiroshi Inoue
     TOKYO (MNI) - Bank of Japan officials are heartened by a firm rebound in
industrial production for December following the declines in October and
November, but bank officials maintain their cautious outlook, MNI understands.
     BOJ officials expect industrial production to continue recovering in or
after January but are worried about the impact of the coronavirus in China on
factories operated by Japanese manufacturers.
     Those officials are paying attention to the pace of recovering industrial
production.
     Japan's industrial production rose 1.3% m/m in December, stronger than the
MNI median forecast of +0.7%.
     The increase was mainly led by higher output of production machinery,
general-purpose and business oriented machinery, and electronic parts and
devices.
     --BIG Q4 DROP
     Despite the December spike, Japan's industrial production for the
October-December quarter fell 4.0% q/q, weighed down by weak exports and the
damage caused by natural disasters which brought economic contraction.
     Bank officials don't expect industrial production to pick up immediately as
factory output is a tug of war between upward pressure from recovery production
and downward pressure from weak overseas demand, in areas such as automobiles
and capital investment.
     Development in industrial production for the first quarter is vital for the
BOJ to predict the economic outlook. The output is a key piece of data for BOJ
officials in assessing the overall outlook as it reflects both external and
domestic demand.
     Shipment of capital goods excluding transport equipment for the fourth
quarter fell 6.3% q/q for the first drop in three quarters following +2.9%,
indicating that capital investment overseas remained weak.
     In one bright sign, production of electronic parts and devices for the
fourth quarter rose 2.4% q/q following +3.4% in 3Q, showing demand for
IT-related goods has been recovering steadily.
     METI maintained its assessment, saying that "production is weakening" but
they see production rising 3.5% (revised from +2.5%) in January before rising
4.1% in February.
     Adjusting the upward bias in output plans, government forecast production
would rise 0.5% m/m in January.
     Based on this assumption, and if output is flat in March, production for
the January-March quarter would rise 3.7% q/q, the first rise in three quarters
following -4.0% in Q3.
     --TOKYO CPI SLOWS
     January's Tokyo core consumer price index, a leading indicator of the
national inflation rate, rose 0.7% y/y recording a 31st straight rise, with the
pace decelerating from +0.8% in December.
     BOJ officials are encouraged by the continuous steady service prices as
Tokyo saw processed food prices higher by 1.6% y/y in January after +1.4% in
December, pushing up the total CPI by 0.21 percentage point, up from 0.18
percentage point in December.
--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com
--MNI Sydney Bureau; +61 405322399; email: lachlan.colquhoun.ext@marketnews.com
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