REPEAT: MNI ANALYSIS: BOJ: Factory Output Indicates Q2 Growth

Repeats Story Initially Transmitted at 05:34 GMT May 31/01:34 EST May 31

--BOJ Officials Watching Softer Demand For Electronics 

By Hiroshi Inoue

     TOKYO (MNI) - Japanese industrial production lost some steam in April, but

both output and shipments posted the third straight monthly rise, supporting the

Bank of Japan's view that the economic contraction in the first quarter was a

temporary blip, MNI understands.

     The government's survey of factory operators released Thursday showed that

production would fall in May, led by lower output of passenger cars and

semiconductors, but BOJ officials do not believe they need to change their

assessment that production has been on a "moderate rising trend."

     --SEASONALLY WEAK OUTPUT

     Industrial production of transport equipment among others tends to fall in

January, May and August due to factory shutdowns around public and seasonal

holidays for the New Year, Golden Week and Obon.

     However, BOJ officials are paying attention to how production will evolve

for the rest of the second quarter to gauge the underlying trend.

     Industrial production rose 0.3% on month in April, coming in weaker than

the MNI median economist forecast of +1.3%, data released Thursday by the

Ministry of Economy, Trade and Industry showed. It marked the third straight

month-on-month rise but decelerated sharply from +1.4% in March and +2.0% in

February.

     --SOLID AUTO OUTPUT

     The April increase was led by higher output of passenger cars, production

machines and fabricated metals. It was partly offset by lower output of

electronic parts and devices, air conditioners and cosmetics.

     Production of transport equipment rose 3.9% on month in April, with the

pace of increase accelerating from +0.8% in March.

     It is consistent with a faster pace of Japanese automobile exports at

+15.3% on year in April after +5.4% in March as some firms increased their

shipments overseas in April before the Golden Week holidays, the BOJ views.

     Based on its survey of manufacturers, METI projected that industrial

production would rise 0.3% on month in May (revised up from -1.6% forecast last

month) and fall 0.8% in June.

     Adjusting the upward bias in output plans, METI forecast production would

fall 1.3% on month in May. Based on this assumption and June forecast, factory

output would rise 0.7% on quarter in Q2 after slumping 1.3% in Q1, the first q/q

drop in eight quarters.

     Production of transport equipment is projected by METI to fall 7.0% on

month in May but is expected to rise 0.8% in June.

     --WEAK DEVICES OUTLOOK

     BOJ officials judge that manufacturers aren't suffering from excess

inventories, although shipments of electronic parts and devices fell 0.7% on

month in April after +6.9% in March, in contrast to a 1.8% rise in overall

industrial shipments in April.

     Inventories of electronic parts and devices rose 3.2% on month in April but

the pace of the buildup slowed from +12.8% in March.

     The officials are also paying close attention to how global demand for

Japanese electronics -- used in various products including smartphones and

computers -- will change in light of the 5.6% output drop in April and a

projected 6.0% decline in May.

     --SOLID CAPITAL GOODS

     BOJ officials don't see the need to change their latest view that

"industrial production will likely continue to increase firmly for the time

being on the back of the increase in demand at home and abroad."

     Among bright spots, global demand for Japanese capital goods remains solid

amid increasing business investment in equipment overseas.

     Thursday's data showed that shipments of capital goods excluding transport

equipment, a leading indicator of capex, rose 2.7% on month in April, the second

straight month-on-month rise after +3.0% in March.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com