MNI POLICY: Japan Output Up In Aug; BOJ Cautious On Outlook

Japan's industrial production rose for a third straight month in August, giving officials at the Bank of Japan some encouragement, although they are still aware downside risks exist as some areas, including shipments of ex-transport capital goods, remain weak.

Boosted by auto production, electronics and iron/steel output, industrial production rose 1.7% in August, largely in line with the expectations of BOJ economists. However, they see output largely flatlining or picking up slowly from here, awaiting a full global recovery.

Industrial output remains a key piece of data to aid BOJ economists assess the outlook, as it reflects both external and domestic demand, with the Board upping their view at the September meeting to reflect the recent pick-up.

CAR OUTPUT SLOWS

Car production rose 8.9% m/m in August but slowed from a 38.4% gain in July and a 28.6% rise in June, indicating that pent-up demand has peaked. Auto production remained weak against year ago levels; down 19.5% y/y in August. Transport equipment accounts for about 20% of Japan's total output with the auto industry alone accounting for about 3% of Japan's GDP.

Shipments of capital goods excluding transport equipment fell 8.7% m/m in August following a 1.0% fall in July, suggesting many firms are still cautious about implementing capital investment, although demand for research and development remains solid. Production for electronic parts and devices rose 4.6% m/m in August for a third straight rise following the 4.6% gain in July, consistent with export data.

Q3 REBOUND

The government left its assessment unchanged from the previous month, noting "industrial production is recovering" and sees production rising 5.7% (revised up from +1.9%) in September before further rising 2.9% in October.

However, adjusting the upward bias in output plans, the forecast production would rise 2.8% m/m in September. Based on this assumption, Q3 production would rise 8.8% q/q for the first rise in two quarters following Q2's 16.9% fall.