MNI INSIGHT: Weak Nov Factory Output Worries BOJ

By Hiroshi Inoue

     TOKYO (MNI) - Weak industrial production data in November will increase

Bank of Japan concern at the outlook for economic recovery, MNI understands.

     The data, a key piece of information for BOJ officials in assessing the

overall outlook, showed that any recovery in production after recent natural

disasters was minimal.

     BOJ economists don't expect industrial production to pick up immediately as

factory output is a balance between upward pressure from recovery production,

and downward pressure from the post-tax hike falls and weak overseas demand.

     The BOJ last week downgraded its assessment of industrial production

following weak data for October (down 4.5% on month), saying, "industrial

production has declined recently, due partly to the effects of natural

disasters."

     The previous assessment was that industrial production "has been more or

less flat."

     --FACTORY OUTPUT DROPS

     Industrial production, a closely watched guide for overall demand in the

economy, fell 0.9% on month in November for the second straight drop following

-4.5% in October, preliminary data released Friday by the Ministry of Economy,

Trade and Industry showed.

     The decrease was mainly led by lower production of electrical machinery,

and information and communication electronic equipment.

     Production machinery fell 8.9% on month in December (vs. -6.4% in November)

and production of electrical machinery fell 2.9% in December (vs. -4.6% in

November).

     The data indicated that demand for capital goods excluding transport

equipment, which are used for capital investment, remained weak at home and

abroad.

     Shipments of capital goods excluding transport equipment, another key focus

for the BOJ, fell 6.0% in December following -12.7% in November.

     On the bright side, production of motor vehicles rose 4.5% in December

following -7.9% in November. Production of electronic parts and devices rose

0.1% in December following +0.9% in November, indicating demand for IT-related

goods is recovering gradually.

     METI kept to its assessment, saying that "production is weakening" and it

forecast production rising 2.8% (revised from +1.1%) in December before rising

2.5% in January.

     Adjusting the upward bias in output plans, the government forecast

production would rise 0.4% on month in December.

     Based on this assumption, production for the October-December quarter would

fall 4.1% q/q, the second straight drop following -0.5% for the third quarter.

     --TOKYO CPI RISES

     December's Tokyo core consumer price index, a leading indicator of the

national inflation rate, rose 0.8% on year recording a 30th straight rise, with

the pace accelerating from +0.6% in November.

     The BOJ is heartened by the rise in the Tokyo inflation rate but maintains

its cautious view amid uncertainty over the impact of the drop in real income

caused by the tax hike on consumer spending.

     Economic data related to spending remained weak in October and November,

indicating the possibility that weaker spending will impede corporate retail

price hikes and prompt firms to lower retail prices.

     The December core CPI was mainly boosted by higher goods prices excluding

perishables (+1.5% on year in Dec. vs. +1.1% in Nov.) and also by solid prices

for eating out (+3.5% on year in Dec. vs. +3.7% in Nov). But some gains were

erased by low energy prices and prices for pre-school fees.

     The December core CPI was weighed by the drop in energy prices (-1.2% on

year in Dec. vs -1.3% in Nov.) Its negative contribution narrowed to -0.06

percentage point in December from -0.07 percentage points in November.

     The Tokyo data points to a solid nationwide December inflation rate, due to

be announced on Jan. 24, which could see the core number rise from +0.5% in

November.

--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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