MNI INSIGHT: BOJ: Capex, Capital Goods Vital In Virtuous Cycle

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials believe that downside risks to the

global economy are higher now than in April, although they anticipate that solid

capital investment can deliver an improvement among overseas economies later

this year, MNI understands.

     The impact of slowing overseas economies hasn't spilled over into

industrial production as domestic demand remained solid, BOJ officials believe.

     If firms were seriously worried about a delay in a global economic pickup

this would increase downward pressure on capital investment plans, which in turn

would increase the risk of a reversal in the virtuous cycle of profits to

spending, the officials warn.

     The BOJ view is that any initial impact of a deterioration in the virtuous

cycle would be on the shipment of capital goods - excluding transport equipment

and capital investment by machinery-related firms, MNI understands.

     --IMF REVISING GROWTH DOWN

     The International Monetary Fund on Tuesday revised down its global economic

growth forecast to +3.2% in 2019 and to +3.5% in 2020 from the previous forecast

of +3.3% and +3.6% made in April.

     China's growth forecast was also revised down to +6.2% in 2019 and +6.0% in

2020, from +6.3% and +6.1% in April.

     China's economy decelerated to 6.2% y/y in the second quarter from 6.4% in

the first quarter. It was the slowest growth since at least 1992.

     If Chinese economic growth fell below 6.0% it would adversely affect other

Asian countries and darken the outlook for Japan's exports and capital

investment, BOJ officials believe.

     Japan's exports to Asia account for around 55% of the total exports, with

China comprising 20%.

     As a result of a delay in adjustments of IT-related goods, capital

investment has fallen overseas and this is darkening any smooth recovery of

Japan's exports of capital goods excluding transport equipment and IT-related

goods.

     BOJ economists maintain the view that the underlying trend of domestic

consumer spending remains solid, even without the last minute surge in demand

before the consumption tax hike on October 1.

     BOJ officials admit that demand for durable goods, including household

appliances, has been boosted by the last minute surge in demand before the tax

hike and this demand will increase with the tax hike approaching.

     The BOJ has analyzed the last-minute surge in demand before the tax hike,

and believes that the reaction after the tax hike will be less than the previous

tax hike in 2014 due to government measures to mitigate its impact on consumer

spending.

     However, BOJ officials are paying attention to how private consumption

evolves after the tax hike, as weaker spending will worsen business sentiment

among non-manufacturers and result in lower capital investment, a major factor

in supporting economic expansion.

     The BOJ's supply-side Consumption Activity Index has posted the first drop

in two months, down a real 0.4% on a seasonally adjusted basis in May, following

+1.7% increase (revised from +1.4%) in April.

     But the index for the April-May period rose 0.8% quarter-on-quarter,

accelerating from 0% in the first quarter. 

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

--MNI Sydney Bureau; +61 405322399; email: lachlan.colquhoun.ext@marketnews.com

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