MNI POLICY: Japan Factory Output Rises; BOJ Still Watchful

By Hiroshi Inoue

     TOKYO (MNI) - Japan's industrial production rose for a second straight

month in January, recovering from the sharp downturn in Q4, but Bank of Japan

officials are still cautious on the outlook, expecting the negative impact of

the coronavirus to begin in earnest this month.

     Japan's industrial production rose 0.8% m/m in January, a second straight

gain following a 1.2% gain in December.

     Bank officials had expected a bounce in January factory output following

weak Q4 data caused by a string of natural disasters and the October tax-hike.

     January's increase was led mainly by higher output of motor vehicles and

transport equipment excluding automobiles.

     Shipment of capital goods excluding transport equipment that BOJ officials

focus on fell 5.1% m/m in January for the first drop in two months following a

12.7% gain in December, indicating capital investment remained weak.

     Production of electronic parts and devices fell 1.3% m/m in January for the

first drop in four months following +12.7%, indicating that demand for

IT-related goods hasn't not been recovered smoothly.

     --Q1 OUTPUT SEEN RISING

     METI largely maintained its assessment, saying "industrial production

fluctuates indecisively, but has weakened." The government see production rising

5.3% (revised from +4.1%) in February before falling 6.9% in March.

     Adjusting the upward bias in output plans, the government forecast

production would rise 2.0% m/m in February.

     Based on this assumption, and if output is flat in March, production for

the January-March quarter would rise 0.3% q/q, the first rise in three quarters

following -4.1% in the October-December period.

     But the output for the first quarter would be weaker than the estimates as

the survey of production forecast shows the figures as of the 10th of each

month, meaning that the impact of the coronavirus, which has worsened since

mid-February, isn't included, the BOJ views.

     Bank officials don't expect industrial production recovering immediately,

buffeted between modest upward pressure from recovery production and weighed by

weak overseas demand and the disrupted supply chains in China.

     --TOKYO CPI SLOWS

     February's Tokyo core consumer price index, a leading indicator of the

national inflation rate, rose 0.5% y/y recording a 32nd straight rise, although

the pace decelerated from +0.7% in January.

     The data indicated that the nationwide core CPI for February will likely

fall from the 0.8% rise seen in January.

     The slowing inflation rate was mainly caused by lower prices for energy

item and for overseas holiday tours.

     BOJ officials are concerned that sluggish private spending and the drop in

Chinese tourists may lower consumer prices.

     They are also paying attention to how service prices, especially

eating-out, remain solid as service prices slowed to +0.7% y/y in February from

+1.0% in January.

     Prices for eating-out rose 3.6% in February from +3.5% in January.

--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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