REPEAT:MNI INSIGHT: BOJ: Q2 GDP Backs Pickup View, Trade Focus

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials are heartened by a sharp rebound in

April-June GDP after a snow storm-hit contraction in the winter months, but they

are vigilant against the drag from the U.S.-China trade dispute on global demand

and thus Japan's exports, MNI understands.

     BOJ officials expect Japan's economy to stay on a modest recovery track for

now as domestic demand remains solid and exports haven't been hit by forecasts

for slower global growth.

     --JAPAN GDP REBOUNDS

     Japan's economy for the April-June quarter posted a solid 0.5% rise on

quarter, or an annualized 1.9%, backed by stronger consumption and business

investment and rebounding from a slump in January-March, the Cabinet Office said

Friday.

     It came in firmer than the median economist forecast for +0.2% q/q, or an

annualized +1.0%. The growth in the second quarter followed a contraction of

0.2% on quarter, or an annualized -0.9% in the first quarter.

     BOJ officials see no need to change their view that Japan's economy is

likely to continue growing at a pace above its potential (somewhere between 0.5%

and 1.0%) in fiscal 2018.

     --JULY TRADE EYED

     They are focused on July trade data due out on Aug. 16 to gauge whether

global demand and Japanese exports have been influenced by the U.S.-China trade

row.

     Japanese exports have been supported by global demand for automobiles,

chip-making equipment and capital goods for business investment,

     In June, exports of power generating machines surged 15.4% on year, up from

+4.9% in May, while those of semiconductors rose 9.0%, also up from +8.4%. By

contrast, the pace of shipments of Japanese auto parts to the world slowed to a

8.4% rise in June from +10.4% in May.

     --MARKETS, SENTIMENT KEY

     Strong capital investment plans by Japanese firms, found in surveys

including the BOJ's Tankan, are based on solid global demand for Japanese goods.

     The GDP data showed business investment in equipment rose 1.3% on quarter

in Q2 (the median forecast was +0.6%) for the seventh straight q/q increase,

with the pace of increase accelerating from +0.5% in Q1.

     Going forward, however, BOJ economists are looking at the risk that a

worsening of business sentiment and volatile financial markets caused by the

U.S. conflicts with its major trading partners will prevent firms from

implementing capital investment plans.

     They think it takes time to ascertain the impact of the trade disputes on

the real economy through economic data while changes in the financial markets

and sentiment may work as an early warning system.

     Capital investment by Japanese companies in the current fiscal year is

expected to rise 21.6% on year, a seventh straight annual rise and the highest

rate of growth since fiscal 1980, a recent survey by the Development Bank of

Japan showed.

     But Hideo Hayakawa, a former BOJ chief economist and currently senior

executive fellow at Fujitsu Research Institute, warned in an interview with MNI

this week, "Strong capital investment plans toward the end of an economic

expansion cycle is bad news."

     He was referring to the risk of boosting production capacity when demand is

about to slip, which could trigger a cut in capital stock later, pushing down

GDP.

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