MNI BRIEF: Weak Capex Clouds BOJ View on Firms’ Virtuous Cycle

Weak revised capital investment in Japan's gross domestic product for the first quarter is overshadowing an optimistic view on capex held by Bank of Japan officials, but the BOJ will not change its assessment before the release of the BOJ June Tankan survey, MNI understands.

The BOJ is paying attention to how capex investment will be revised as weaker capex in the first preliminary GDP overshadowed a solid view on capex by BOJ officials.

Bank economists were strongly discouraged by weaker capex (-1.4%) in the first preliminary GDP, as it wasn't consistent with other data and their assessment on capex.

But they expected capex to be revised up following firm capex data in a corporate business survey released by the Ministry of Finance.

Capex fell 1.2% q/q in the second preliminary GDP released by the Cabinet Office on Tuesday, revised up slightly from -1.4%.

Weak capex will increase concern over a pause in a virtuous cycle from income to spending in the corporate sector that the BOJ cited in the April Outlook Report.

The focus among bank economists has shifted to whether capex plans will be revised up in the June Tankan survey due out on July 1 from the plans in March, which is a normal pattern.

Bank officials firmly expected capex to remain in a recovery phase, supported by the improvement of corporate profits.

The bank has analyzed that profits have been improving even at a faster pace than the sales recovery and cited two factors behind the improvement in profits.

The first is a substantial reduction in selling, general and administrative expenses, such as social expenses, business travel amid the pandemic.

The second is the improvement in corporate profits outpacing the sales recovery in the wake of an unprecedented scaling up of income transfers caused by various measures to support businesses.

Firm corporate sentiment and machinery orders as a leading indicator of capex also supported the BOJ's optimistic view on the outlook for capex.

However, weak capex is increasing BOJ worries that if corporate medium- to long-term growth expectations fall, they will undermine the BOJ baseline recovery view.