REPEAT: MNI POLICY: Output Rebounds In Q2, BOJ Still Cautious

Repeats Story Initially Transmitted at 01:52 GMT Jul 30/21:52 EST Jul 29

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan still sees industrial production as

vulnerable to a prolonged global slowdown and remains vigilant to the outlook,

despite a pick-up in output over the April to June period, MNI understands.

     Despite a month-on-month fall in June, Japan's industrial production

bounced back in Q2, but didn't recover strongly enough to cover the sharp fall

seen in Q1. Output rose 0.5% q/q in Q2, recovering but shy of the 2.5% fall seen

in Q1.

     Weak overseas markets were offset by solid production of equipment for the

domestic market, supporting the BOJ's view that the economy is expanding

moderately at home.

     --WEAKER JUNE OUTPUT

     June's production fell 3.6% m/m (vs. the median forecast of -2.0%) after

gaining 2.0% in May. Lower production for motor vehicles, production machinery,

electrical machinery and information and communication electronics equipment all

weighed, preliminary data released Tuesday by the Ministry of Economy, Trade and

Industry showed.

     Production for electronic parts and devices - a key area of focus for BOJ

officials -- fell 2.4% on quarter for the April-June period after falling 9.6%

in Q1.

     Production for information and communication electronics equipment rose

4.9% Q/Q, rebounding from a 6.0% fall in the first quarter.

     Shipments of capital goods excluding transport equipment, another key

element that BOJ officials watch, rose 2.5% in Q2 following a 6.0% fall last

quarter.

     --OUTLOOK

     The cautious outlook for the global economy and prolonged adjustments for

IT-related goods are still weighing on capital investment overseas, restricting

Japan's shipments of capital goods. Domestic demand remains solid due to firm

capital investment and private consumption.

     But a prolonged slowdown overseas will quickly see firms turn more cautious

on the outlook slowing the implementation of capital investment plans -- and

METI sees overall production lower by 1.7% q/q in Q3.

     The BOJ is still watchful, with the realization ratio -- real production of

the previous month in the current month's survey divided by the estimated amount

of the current month in the previous time's survey - remained weak in June, down

2.2% versus -2.5% in May and -1.9% in April.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

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