MNI INSIGHT: Solid Output Backs BOJ View; Infln Outlook Worry

By Hiroshi Inoue

     TOKYO (MNI) - The latest Tokyo inflation data will again dampen Bank of

Japan hopes for an early pick up in nationwide prices towards their 2% target,

but the better than expected May industrial production numbers will allow the

central bank to maintain the outlook of a modestly expanding economy as it

readies for the July policy meeting, MNI understands.

     May's industrial production data underpins the BOJ's view that the virtuous

cycle from income to spending is still in place, as domestic demand from both

capital investment and household spending remain solid, but officials admit that

weak overseas demand caused by the ongoing U.S./China trade spat remains an

issue.

     --FACTOR OUTPUT RISES

     Industrial production rose 2.3% on month in May after rising 0.6% in May,

preliminary data released Friday by the Ministry of Economy, Trade and Industry

showed, with the pick-up seen across industry sectors, led by output linked to

capex spending.

     METI sees production "marking time" forecasting it to fall 1.2% in June

(revised up from -4.2%) before rising 0.3% in July. That would see output rise

1.4% q/q in Q2, bouncing back somewhat from the 2.5% fall in Q1.

     The BOJ is still cautious, though, as the realization ratio, showing how

actual production deviated from that initially planned, remained weak in May,

down 2.5% vs. -1.9% in April and -1.2% in March.

     --TOKYO CPI SLOWS

     Central Tokyo core inflation, a leading indicator for the nationwide data,

rose 0.9% on year in June, a 24th straight rise but slowing from May's +1.1%,

suggesting there had yet to be any noticeable impact from corporate retail price

hikes on government data.

     The data suggests a slowdown in nationwide data from May's +0.8% when the

June data is released on July 19.

     --LOWER PHONE CHARGES

     Tokyo CPI was lower in some part due to the impact of lower mobile phone

charges, which fell 5.8% y/y versus a 4.3% fall in May. BOJ economists don't see

any lasting downside pressure on prices from lower phone bills, as the resultant

increased real incomes will have a steadying impact.

     The BOJ will look to Tuesday's Tankan survey follow-up to examine corporate

inflation expectations, looking for guidance on potential price hikes ahead of

the consumption tax increase expected in October.

     Higher processed food prices offered some encouraging signs for the BOJ, up

1.3% on year in June, accelerating from 1.2% in May. Prices for eating out also

rose, up 1.2%, but slowing from 1.3% in May.

     Services prices overall, which account for just over half of the CPI

basket, were unchanged from May's +0.6% in June. Goods prices excluding

perishable foods rose 1.3% on year in June after +1.7% 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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