MNI INSIGHT: Weak Corporate Spend A BOJ Virtuous Cycle Concern

Weak corporate spending on capital investment and on reinvesting profits as a driver of a virtuous economic cycle remains a concern for Bank of Japan officials headed into the June policy review even as the country opens to tourism this month and services return to normal, MNI understands.

Private consumption, which is expected to rebound on pent-up demand, may lose momentum on higher costs for food and energy that has taken consumer prices above 2.0%, with the views driving the BOJ's continued stance on easy policy, MNI understands, (See MNI INSIGHT: Japan Apr CPI Above 2%, But BOJ Easy Policy Stays).

The concerns come ahead of the 16-17 June policy setting meeting where the BOJ could tweak language on the economic impact of Covid-19 and also provide guidance on second quarter growth after a first quarter contraction.

TANKAN A KEY

A firmer reading awaits from the BOJ’s June Tankan business sentiment survey due on July1. But with businesses absorbing higher energy costs and importers dealing with a weaker yen, there is uncertainty on the willingness to implement capital investment plans.

Any caution by companies on spending would likely flow to consumers, facing the same issues, though somewhat cushioned by a large amount of “standby” funds set aside during the pandemic that are expected to provide some of the fuel for a pent-up demand rebound.

The scale of standby funds is estimated by the BOJ to be about JPY50 trillion, or about 9% of gross domestic product, (See MNI INSIGHT: BOJ Eyes Industrial Lag And Consumption Rebound).

Bank officials judge that private consumption is moving in line with the April forecast of "picking up again.” The consumer confidence index rose in May, but is still far below pre-pandemic level, indicating spending will not rebound quickly.

GLOBAL OUTLOOK

A weaker global economy is also a factor for the BOJ outlook, especially for exports related to manufacturing such as the all-important automobile sector which has faced parts shortages linked to supply chain disruptions.

Bank officials are focused on whether the International Monetary Fund revises down its global growth forecast from April’s +3.6% and slower growth in the U.S. economy as the Fed moves to tighten policy. The state of play for China's economy is also a factor after Shanghai in June eased from two months of strict Covid-19 lockdown curbs, (See: MNI BRIEF: PBOC Vows Further Easing To Boost Credit To SMEs.)