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Pullback Considered Corrective


Holding Above Recent Lows


BLOCK, Large 3Y Midcurve Put Condor

MNI (London)
By Hiroshi Inoue
     TOKYO (MNI) - The Bank of Japan is still cautious that sluggish overseas
demand will weigh on domestic capex spending in Q1, despite its own Real Export
Index bouncing back smartly in February, MNI understands.
     The index, calculated by the BOJ based on Ministry of Finance trade data,
rose 6.0% m/m in February, reversing a weak January reading, but the reading for
the combined Jan-Feb period was still 2.7% lower than the previous quarter.
     BOJ officials expect Japan's exports to remain weak during Q1 on the back
of China's slower economy and don't see a quick pick-up in Q2 despite solid
demand from the U.S., and they are now waiting to see if the March Tankan survey
shows signs of slower capital investment plans by the major manufacturers.
     The BOJ are less concerned that capex plans of non-manufacturers not
directly linked to the export market demand will slow, although they feel there
could be some hesitancy on the back of slower spending by manufacturers.
     At the latest policy-setting meeting ended on Friday, the BOJ board
maintained their overall moderate expansion assessment, noting the "virtuous
cycle from income to spending" was still operating, adding that the economy "is
likely to continue its moderate expansion".
     But in the wake of weaker data, the BOJ lowered its assessment of exports
and industrial production, reflecting slowing economies in China and Europe,
noting that "Exports have shown some weakness recently."
     Japan's exports to China, which accounted for 20% of total overseas sales,
rose 2.0% y/y in February, reversing from a 17.4% fall in January, although
exports to the greater Asian region, which accounted for 52% of total Japanese
exports, fell 1.8% y/y in February following a 13.1% fall in January.
     The weak export index for the last two months, which is strongly linked to
factory output, indicates February's industrial production data, due out March
29, will show a second straight m/m drop.
     The concern is that weakness will filter through to capital investment and
BOJ officials are nervous over the sustainability of the virtuous cycle from
profits to spending, which in turn will undermine the outlook for a sustained
economic expansion.
--MNI Tokyo Bureau; tel: +81 90-2175-0040; email:
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