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Japan's industrial production data on Tuesday pointed to a recovery ahead.
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Bank of Japan officials are concerned the emergence of the Omicron variant of Covid-19 could impede a recovery in industrial production, exports and consumer spending, MNI understands.
This week, Japan along with Australia, Singapore, South Korea and Hong Kong in Asia tightened border controls by suspending or limiting overseas arrivals in whole, or from southern African nations where the variant emerged at a time all of the Asian countries were on a path to open borders wider.
BOJ officials are focused on a rebound in automobile manufacture and exports that depends on access to more semiconductors and parts from suppliers in countries in Southeast Asia to feed a "virtuous cycle" of profits to spending in the corporate sector. Japan is slowly rebounding from pandemic state of emergency measures lifted at the start of October.
SENTIMENT IS KEY
The concern is the Omicron variant could worsen consumer sentiment, which improved sharply in November following a significant drop of new infections and higher vaccination rates, see: MNI INSIGHT: BOJ Eyes Upbeat Sentiment As Important For Q4 GDP.
The BOJ is unlikely to abandon its economic recovery view immediately. However, a quick change to the pandemic recovery path could increase pressure on the BOJ to extend the temporary measures to facilitate corporate financing, which are set to expire March 2022, or to modify the measures focused on non-manufacturers and smaller firms.
The U.S. Fed too is said to be concerned that the Omicron variant poses downside risks.
AUTOS LEAD INDUSTRIAL REBOUND
The BOJ is more on guard the variant could bring more supply-chain disruptions just as Japan's industrial output posted the first m/m rise in four months, up 1.1% in October led by automobile manufacture, preliminary data released Tuesday by the Ministry of Economy, Trade and Industry showed.
Industrial output is a key piece of data for BOJ economists to assess and predict the pace of recovery as it reflects both external and domestic demand.
Also, on Tuesday, the government projected that industrial production would rise 9.0% on month in November, an upward revision from +5.7% forecast last month.
Adjusting the upward bias in output plans, METI forecast production would rise just 4.2% on month in November. Based on this assumption, production would fall 0.4% on quarter in October-December, the second straight drop following -3.7% in Q3.