MNI POLICY: Tokyo CPI Rise Slows; Ups BOJ Outlook Concern

--Japan Industrial Output Bounces Back From July Fall

--BOJ Still Cautious Over Impact Of Weak Exports

By Hiroshi Inoue

     TOKYO (MNI) - Slowing core inflation in Tokyo has increased concern at the

Bank of Japan over the outlook for national prices, despite a pick up for

industrial orders in July, as volatile financial markets and ongoing global

trade spats still signpost growing downside risk, MNI understands.

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

national inflation rate, rose 0.7% on year recording a 26th straight rise, but

the pace slowed from 0.9% in July and June.

     According to the BOJ, what upside pressure there was on prices came largely

from corporate price hikes on durable goods, with businesses taking advantage of

strong domestic demand ahead of an October hike in sales taxes - and the concern

is those prices will fall in Q4 after the tax hike.

     Tokyo points to lower nationwide August inflation and the data due Sept 20

could see the core number dip to 0.6% -- below the BOJ's expectations in July

and undermining its outlook.

     --FLAT SERVICES PRICES

     BOJ officials are worried over the inflation outlook as costs in some

services sectors, including prices for eating out, which rose an unchanged 1.1%

in August, haven't seen a pick-up in upward momentum for a while and sit below

the 1.3% peak seen in May.

     Processed food prices, which accounts for 15% of the total CPI, rose just

1.0% on year in August according to Tokyo data, slowing from 1.2% in July,

indicating a deceleration in the rate companies are passing through.

     Services inflation, which accounts for just over a half of the CPI basket

the BOJ looks at, rose 0.4% on year in August, unchanged from July.

     --JULY OUTPUT REBOUNDS

     July industrial production rose 1.3% on month, bouncing back from June's

3.3% fall, helped by higher motor vehicles and chemicals output. Production for

information and communication electronics equipment dropped, but there was a

pick-up in that of electronic parts and devices - a sector closely watched by

the BOJ.

     Shipments of capital goods excluding transport equipment, another key focus

for the BOJ, rose 0.3% in July following a 5.0% decline in June.

     The sluggish global economy is certainly holding production back, but

domestic demand remains solid on the back of corporate capital investment and

private consumption. There is still a concern at the BOJ that a prolonged

slowdown for the global economy will eventually spill over and weigh on domestic

demand.

     The government assessment remained that "production is marking time" with

it seen rising 1.3% in August before falling 1.6% in September. Adjusting the

upward bias in output plans, government forecast production would fall 0.7% on

month in August.

     Based on this assumption, production for the July-September quarter would

fall 1.3% on quarter, the first drop in two quarters following +0.6% for the

April-June period.

     The BOJ remains cautious, though, as the realization ratio, showing the

real amount of the previous month in the current time's survey divided by the

estimated amount of the current month in the previous time's survey, remained

weak in July, down 1.3% following falls of 2.2% in June and 2.5% in May

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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