MNI POLICY: Japan Apr Factory Output Down 9.1%; Q2 Seen Weaker

By Hiroshi Inoue

     TOKYO (MNI) - Japan's industrial production posted a third straight monthly

drop in April and factory output is expected to fall sharply in Q2 with auto

sales and capital investment weaker.

     Japan's industrial production fell 9.1% m/m in April following a 3.7% fall

in March and a 0.3% drop in February.

     The decrease was driven by lower production of autos, iron and steel, and

non-ferrous metals, all consistent with weak exports for April.

     --WEAKER AUTOS

     Car production fell 33.3% m/m in April for a third straight drop following

a 5.1% fall in March. Transport equipment accounts for about 20% of the total

output and the auto industry accounts for about 3% of Japan's GDP.

     Shipments of capital goods excluding transport equipment rose 1.9% m/m in

April for a first rise in two months but was much weaker than a 9.1% fall in

March.

     --Q2 OUTPUT SEEN FALLING

     The government lowered its assessment from the previous month, saying that

industrial production is falling "rapidly".

     The government sees production falling 4.1% (revised from -1.4%) in May

before rising 3.9% in June, although adjusting the upward bias in output plans,

the forecast production would fall 5.7% m/m in May.

     Based on this assumption, and if June output is flat, 2Q production would

fall 13.8% q/q after a 0.4% gain in 1Q and -3.6% in 4Q of 2019.

     --TOKYO CPI REBOUNDS

     Tokyo core inflation rate rose 0.2% y/y in May, for the first rise in two

months following -0.2% in April, due to smaller price fall of household durable

goods and higher prices of goods excluding perishable foods.

     But it is unlikely that core CPI continues rising in the coming months as

the drop in crude oil price affects prices for utilities, albeit  with a few

months lag.

     Tokyo data points to a solid nationwide May inflation rate (due June 19)

which could also see the core number rising from April's 0.2% fall.

     BOJ officials are encouraged by the rise in core-core CPI excluding fresh

foods and energy, as the underlying trend that the officials focus on rose 0.5%

in May, widening from +0.2% in April.

     The impact of lower energy items on core CPI was offset by smaller price

fall of accommodations, overseas holiday tours and household durable goods.

     Price for energy items fell 4.7% y/y in May, widening from -4.3% in April;

its negative contribution widened to -0.26 percentage points in May from 0.24

pp.

     --SOLID SERVICE PRICES

     Price for services rose 0.4% in May, rising from +0.2% in April, and price

for eating and drinking services rose 2.9% in May vs. +3.1% in April, indicating

firms haven't lowered their retail prices despite weak demand.

     Processed food prices, which accounts for 15% of the total CPI that BOJ

officials are focused on, rose 1.2% y/y in May, widening from +1.0% in April.

--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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