MNI INSIGHT: BOJ Notes Tankan Shows Labor Shortages Worsening

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials took particular note of the Tankan

December business survey results showing labor shortages in all industries have

worsened from three months ago and that costs are rising at a faster pace than

firms have been passing on in higher sales prices, MNI understands. 

     The officials acknowledged that it remains to be seen whether labor

shortages and higher costs will prompt more firms to raise wages and retail

prices, but remained hopeful on the outlook. 

     The BOJ officials also noted that the Tankan data confirmed that the

virtuous cycle from rising profits to solid business investment remains intact

and will support a continuation of the modest economic recovery that the BOJ

board expected in October.

     --Labor Shortages More Serious

     The BOJ survey showed that labor shortages at all firms became more serious

compared to three months ago, squeezing profit margins while exerting pressure

on firms to raise wages to secure quality workers.

     In the December Tankan, the employment index -- based on reports from all

firms of excess employment minus insufficient employment - fell to -31 in

December from -28 in September, the lowest level since February 1992,

underscoring the continued tightening of labor supply.

     As an indicator of the inflation outlook, the diffusion index on production

capacity (excess capacity minus insufficient capacity) fell further to -5 in

December from -3 in September and -2 in June, meaning more firms reported

insufficient capacity. This suggests rising pressures on consumer prices with a

six month lag, the BOJ believes.

     --Higher Costs for Firms, Big and Small

     The Tankan survey also showed that manufacturers continue to face rising

labor and import prices, exerting pressure on them to raise producer prices, BOJ

officials believe.

     The Tankan showed the number of companies that are suffering from higher

energy and labor costs increased from three months earlier. It also showed that

firms have not fully raised the prices of their goods and services to

compensate.

     The index for input prices (costs) among major manufacturers accelerated to

+18 in December from +13 in September, while the index showing output (sales)

prices among major manufacturers rose only slightly to +1 from zero in

September. 

     BOJ officials are also focused on data showing the corporate inflation

outlook, which is part of the December Tankan survey but will not be released

until Monday. They only expect a gradual pickup in the price outlook.

     In the September Tankan survey, companies on average revised down their

expectations for the consumer price index one year ahead from the previous

Tankan survey, but left their inflation outlook for three and five years ahead

unchanged from June.

     --Capex Plans Down, Not Out

     As expected, the downward revision to capital investment plans by major

manufacturers -- the key indicator of overall capex -- came within historical

patterns, indicating that demand for new equipment and offices remains solid,

BOJ officials confirmed.

     The Tankan showed that capital investment plans among major manufacturers

for fiscal 2017 rose 10.2% on year, revised down from a rise of 14.1% projected

by those firms in September. 

     Plans among all firms to invest in equipment rose 6.3% on year in December,

revised up from +4.6% in September while capex plans by all major firms were

revised down slightly to +7.4% from +7.7% three months ago.

     --Sentiment Up, Cautious Ahead

     BOJ officials were heartened by the continued improvement in business

sentiment in December. 

     The diffusion index for sentiment among major manufacturers rose to an

11-year high of +25 in December from +22 in September, coming in stronger than

the MNI survey median economist forecast of +23. It was the fifth quarterly rise

in a row.

     The index is projected by firms to slip to +19 in March 2018 as

uncertainties over economic growth, labor supply and geopolitical risks from

North Korea continue. Tankan results usually show companies holding a cautious

outlook about the future.

     The index among smaller manufacturers rose to +15 in December from +10 in

September, hitting the highest level since August 1991, when it was at +20. It

was the sixth straight quarterly rise.

     By contrast, the index for sentiment among major non-manufacturers showed

no improvement at +23 December, unchanged from September.

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

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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