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BOJ , Govt Both See Output Picking Up In Q3
Japan's industrial production fell 16.7% q/q in Q2 as the impact of the coronavirus pandemic weighed, but Bank of Japan officials expect an increase in output through Q3 as economic activities resume.
Bank officials, however, expect any recovery to be modest, remaining at low levels as overseas economies remain sluggish as the virus impacts linger. The BOJ's latest official assessment says industrial production has declined substantially amid a sharp decline in exports.
However, the better-than-expected industrial production data in June will likely prompt the BOJ to upgrade its assessment at the September 16-17 policy meeting. Industrial output is a key piece of data for BOJ economists to assess and predict the outlook for economy, as it reflects both external and domestic demand.
JUNE OUTPUT UP
The industrial production rose 2.7% m/m in June, the first gain in five months, led by higher auto and production machinery output. Car production rose 28.9% m/m in June after falling 24.3% in May and 36.6% in April.
Transport equipment accounts for about 20% of the total output, with the auto industry alone accounting for about 3% of Japan's GDP.
Shipments of capital goods excluding transport equipment rose 6.5% m/m in June, suggesting ongoing capital investment for research and development remains solid. Production for electronic parts and devices rose 0.3% m/m in June, consistent with export data and BOJ officials now focus on whether production will continue to improve.
JULY, AUGUST SEEN HIGHER
The government upgraded its assessment from the previous month, noting production has stopped falling and it is recovering and sees production rising 11.3% (revised up from +9.2%) in July before further rising 3.4% in August. However, adjusting the upward bias in output plans, the forecast production would rise 3.1% m/m in July.
Based on this assumption and if September output is flat, Q3 production would rise 3.9% q/q after Q2's 16.7% fall.