MNI INSIGHT: Japan Dec Output Rebounds; BOJ Still Worried

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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