MNI INSIGHT: Weaker Oct Factory Output Fuels BOJ Outlook Worry

By Hiroshi Inoue

     TOKYO (MNI) - Continuing weak industrial production data has increased the

levels of unease at the Bank of Japan, although one month's data is unlikely to

force an immediate change in its outlook for the overall economy, MNI

understands.

     Although October's weakness in exports, particularly in the auto and heavy

equipment sectors, is concerning to BOJ officials, they will look through much

of the data, concentrating on quarterly numbers, as they accept there will be

distortions following the Oct 1 tax hike and the recent typhoon Hagibis.

     Although the overall assessment of the economy will likely remain unchanged

when the BOJ meets in December, allowing it to again leave policy on hold, there

is a possibility that the weaker manufacturing data will trigger a downgrade in

its outlook for industrial production from the current "more or less flat",

despite expectations of a bounce back as the impact from the weather events

lessen.

     Industrial production, still a closely watch guide for overall demand in

the economy, fell 4.2% on month in October, after a gain of 1.7% in September,

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

showed.

     --METI UNCHANGED

     METI's assessment was unchanged, saying "production is weakening", seeing

production falling 1.5% (revised down from -1.2%) in November before rising 1.1%

in December. Adjusting the upward bias in output plans, the government forecast

production would fall 1.8% on month in November.

     Based on this assumption, production for Q4 would fall 4.3% q/q, the second

straight drop following the 0.5% fall in Q3.

     The decrease was mainly led by lower production for motor vehicles,

general-purpose and business-oriented machinery, consistent with weak exports in

corresponding sectors for October.

     One bright spot was production of electronic parts and devices, a key

sector of Japan's economy, higher by 0.9% in October following September's 1.8%

fall, underlining that global demand for IT-related goods appears to be

recovering.

     --TOKYO CPI UP

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

national inflation rate, rose 0.6% on year recording a 29th straight rise,

accelerating from 0.5% in October, but offered no real clarity for future BOJ

policy.

     The uptick was largely a result of higher food prices, offset in part by

lower energy prices.

     November core CPI was weighed by the energy price drop (-1.3% on year in

Nov. vs -2.1% in Oct.), although the negative contribution narrowed to -0.07

percentage point in November from -0.11pp October.

     Tokyo data indicates the nationwide November rate, due Dec. 20, could rise

from October's +0.4%.

--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

[TOPICS: MMJBJI,MMJBJ$,M$A$$$,M$J$$$,MT$$$$,MX$$$$]