MNI INSIGHT: Slowing Auto Demand Could Cloud BOJ Outlook

By Hiroshi Inoue

     TOKYO (MNI) - Weak demand for automobiles globally and its negative impact

on the Japanese economy is causing consternation at the Bank of Japan and it

could undermine its baseline view that exports are likely pick up in the

second-half of 2019, MNI understands.

     Japan's economy is heavily dependant on the auto sector and officials are

concerned slumping sales of both cars and parts could spread to many parts of

the economy.

     Although there are some signs exports of IT-related goods may have hit

bottom, any upside benefit to the BOJ's outlook will be hit by the weaker car

and parts sales, with Japan's growth slipping below its estimated potential of

0.5% to 1.0% -- and that would push the much-watched positive output gap lower.

     --MOMENTUM MAY SLOW

     As the positive gap narrows, it will increase the risk that momentum toward

achieving the 2% price target will be lost -- and that is a key trigger point

cited by the BOJ for considering additional easy policy, officials warn.

     The economy is already seen as likely to slow in Q4 after a temporary boost

in Q3 from front-loaded activity ahead of the October 1 sales tax hike, with the

BOJ then expecting a further pick-up in Q1 2020 or just after.

     Capital investment remains resilient to slowing overseas demand and trade

frictions, offsetting some of the risks from a slowing global economy.

     --WEAK EXPORTS

     That outlook is still dependant on exports picking up and if they don't

recover, production will stall and firms will delay the implementation of

capital investment, further threatening the outlook

     The BOJ's real export index of IT-related goods, which accounts for 20.8%

of total exports, rose 2.0% q/q in Q2 after falling -3.6% in Q1, recent data

showed.

     The real export index for motor vehicles and related goods, which account

for 24% of total exports, fell 0.1% q/q in Q2 after a 0.2% gain in Q1.

     The week's trade data heightened BOJ concerns over weak global demand for

autos. Exports to Asia rose 5.8% on year in July, slowing from +11.9% in June,

and exports of parts fell 21.5% y/y in July after a 21.1%y/y fall in June.

     Exports of cars to China rose 31.4% y/y in July, slowing sharply from a

78.7% y/y gain in June -- but exports of auto parts fell 35.0% in July following

-30.5% in June. Exports to the U.S. slowed to +1.5% y/y in July against a 4.3%

gain in June.

     Government data also showed that Japanese auto production fell 8.4% on

month in June after a 5.4% gain in May, while shipments fell 9.1% in June

following a 5.8% gain in May.

--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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