MNI POLICY: BOJ 2Q Export Index +0.1% But Cautious View Intact

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan is still cautious on the export sector

outlook, despite a Q2 rebound in its real export index, as continued weakness in

China is a concern, MNI understands.  

     The REI rose 0.1% in Q2 on the previous quarter, but it wasn't enough to

offset the 1.7% fall in Q1. For June, the index, calculated by the BOJ using

Ministry of Finance trade data, rose 4.0% m/m after a revised fall of 4.5% in

May.  

     The June pick-up was largely a technical rebound due to revisions of

earlier data and not as a result of returning overseas demand, with the BOJ

likely to maintain the view "exports have shown some weakness recently" on the

back of the slowdown of overseas economies, particularly China.

     Beijing reported Monday that its growth slowed to 6.2% on the year Q2 to

the lowest level in at least 27 years. The BOJ is still focussed on how the

weakness of the Chinese economy, along with a delay in adjustments to IT-related

goods, will affect Japan's exports and production in the coming months.

     --WEAK IT-RELATED EXPORTS

     Japan's latest trade data showed continued weak demand for chip-making

equipment across Asia -- China in particular -- concerning BOJ officials who see

a pick-up in IT-related exports as essential for a sustained move to a recovery

path for Japan.

Japan's exports to Asia, accounting for about 55% of its total exports, fell

8.2% y/y in June, hot on the heels of a 12.1% fall in May and the eighth

straight monthly drop. Exports of chip-making equipment to Asia fell 13.8% on

year in June, slowing from a fall of 40.5% in May.

     Japan's exports to the U.S., its largest single export market, rose 4.8%,

the ninth straight increase. But that was not enough to offset the weakness in

exports to China and the rest of Asia.

     Overall exports to China, accounting for about 20% of the total exports,

dropped 10.1% y/y (in June for the fourth straight fall, with the export of

chip-making equipment down 27.1%. Semi-conductor exports to China and Asia

remained weak, with sales to Asia and China down 7.5% and 21.3%, respectively,

widening from -2.7% and -3.4% in May.

     --WEAK EXPORTS, SURPLUS

     Overall, Japan's exports -- a main driver for the economy -- fell 6.7% on

year in June for the seventh straight drop, leaving a surplus of Y589.5 billion

in June, partially reversing a May deficit of Y968.3 billion.

     Although the adjustments for IT-related goods is taking longer than

initially expected by the BOJ, real demand hasn't disappeared completely. BOJ

officials still believe that historical IT business cycles suggest the downward

adjustment may end in H2 of FY19, in line with the average 5-to-6-month

adjustment period.

     Despite the weak patch for exporters, the BOJ doesn't expect Japan's

economy to derail from a recovery path anytime soon as domestic demand remains

buoyant. But continued weakness in global demand, if prolonged, will almost

certainly spill over into domestic economy.

     That would undermine the BOJ's upbeat view that any downward pressure from

the fall in consumer spending after the October consumption tax hike will be

eased by a recovery in exports.

--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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