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

MNI (London)
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
[TOPICS: MMJBJI,MAJDS$,MMJBJ$,M$A$$$,M$J$$$,MT$$$$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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