REPEAT:MNI INSIGHT: EU Slowdown on BOJ Radar As Near-Term Risk

--BOJ Sees A EU Slump As More Immediate Risk Than Trade Rows

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials see a slump in the European Union as

a more immediate risk to Japan's modest economic recovery than the longer-term

drag of U.S. trade disputes, sources familiar with BOJ thinking told MNI.

     BOJ officials are closely monitoring the impact of the recent downtrend in

the manufacturing PMI (purchasing managers' index) in the Eurozone, which posted

the fifth straight drop in May, falling to 55.5 in May from 56.2 in April.

     --TEMPORARY FACTORS

     The BOJ's analysis is that the weak PMI and slowdown in the EU economy in

the first quarter were due mainly to temporary factors, such as bad weather, the

strong euro and in reaction to strong growth in the final quarter of 2017.

     Thus, BOJ officials see no immediate need to revise down their view that

the European economy is "growing moderately."

     However, the officials remain vigilant against downside risks. They are

analyzing the background of the recent weak EU growth and its outlook, keeping a

close eye on the regional developments including the Italian political upheaval.

     --REAL EXPORT REBOUND

     "The real export index in the EU remains solid and it has not yet indicated

a near-term slump of the EU economy. But the EU PMI has continued falling,"

prompting BOJ officials to pay more attention to the European economic outlook

than before, a person who is familiar with BOJ thinking said.

     He said the BOJ must watch the developments in the EU economy than the

longer-term risk that is posed by the protectionist U.S. trade policy, which has

not yet caused harm to global growth.

     The BOJ's real trade indexes showed that Japanese exports to the EU

rebounded 15.9% on month in April, following -8.8% in March and +0.7% in

February. 

     --GLOBAL SUPPLY CHAINS

     Japan's exports to the EU accounts for about 10% its exports to the world,

lower than 50% to its exports to Asia and 20% to the U.S., but Japanese

semiconductors, production machinery and auto parts are being shipped to Asia

and other markets, which are used for exports to the EU.

     If the European economy slumps, Japanese exports to its key markets -- Asia

and the U.S. -- will also slow down.

     Another person who is familiar with BOJ economic assessment said it was

"natural" that the EU economic growth slowed in the first quarter after an

exceptionally high growth in the fourth quarter of 2017.

     Seasonally adjusted GDP grew 0.4% on quarter in Q1 in the Euro area after

+0.7% in Q4, marking the first q/q slowdown since Q2 of 2016.

     Compared to a year before, GDP rose 2.5% in Q1, with the pace of growth

decelerating from 2.8% in Q4, the first slowdown in y/y growth since Q1 of 2016.

     The person added that Q4's 2.8% growth was far above the EU's potential

growth, which is estimated to be around 1.5%, and the focus is on the pace of a

further slowdown in the coming quarters.

     --SOLID SO FAR

     At its next policy meeting on June 14-15, the BOJ board is expected to

maintain its assessment on global growth, saying, "Overseas economies are

expected to continue growing firmly as global production and trade activity of

the manufacturing sector are likely to be firm, and both the advanced and

emerging economies are projected to growth in a well-balanced manner."

     The BOJ will also keep its view that Japan's exports are likely to continue

their moderate uptrend on the back of the firm growth in overseas economies.

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