MNI INSIGHT: BOJ Sees Econ Cycle Intact On Solid Tankan Capex

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan concerns that the economy could deviate from

its recovery path in the near-future have been eased by the September Tankan

business sentiment survey which shows a continued follow through from corporate

profits to investment spending, MNI understands.

     BOJ officials are encouraged by the solid capital investment plans of both

major and smaller firms, indicating the impact of current trade frictions on

corporate business plans is limited.

     However, BOJ officials are keeping a close eye on whether firms implement

capex plans amid the lingering uncertainty over global demand and whether global

financial markets remain stable.

     --VOLATILE MARKET CONCERNS

     The BOJ is concerned that increased volatility in global financial markets

would hit business sentiment and likely prevent firms from implementing capital

investment, which in turn will upset the economic recovery.

     The diffusion index for major manufacturers, calculated by subtracting the

number of companies reporting deteriorating business conditions from those

reporting an improvement, posted the third straight quarter-on-quarter drop in

September. It fell to +19 in September from +21 in June, hit by the lingering

uncertainties regarding the global economy and higher energy and raw material

costs.

     The DI is expected to be unchanged at +19 in December, reflecting corporate

cautious stance amid the ongoing trade friction.

     Business investment plans by major firms, the key to a pickup in domestic

demand, are projected to rise 13.4% y/yin the current fiscal year, slightly

revised down from +13.6% in forecast in the June survey. Capex plans by smaller

firms are expected to fall 8.4% in fiscal 2018, revised up from -11.8% in June.

     The levels of capital investment plans by both large and smaller firms in

the current fiscal year were close to their historical averages.

     --PRICE HIKES INTACT

     BOJ officials are also focused on the corporate price-setting stance in the

Tankan, as they examine momentum toward their 2% price target.

     The index for input prices (costs) among major manufacturers fell to +27 in

September from +30 in June while the index showing output (sales) prices among

major manufacturers rose slightly to +7 from +5 in June.

     This means that companies have a continued willingness to raise their

retail prices, although concerns over high input prices eased somewhat.

     BOJ officials expect upward pressure on wages to increase, with the Tankan

showing continued tight labor supply.

     The employment index -- based on reports of excess employment minus those

citing insufficient employment - fell to -33 in September among all firms, down

from -32 in June. The employment index for smaller firms fell to -37 in

September from -35 in June and the DI is expected to slip to -42 in December.

     --SOLID OVERSEAS DEMAND

     The Tankan showed that companies didn't see overseas supply and demand

conditions for products worsen, indicating the U.S. trade disputes with major

economies have not (yet, at least) led to a fall in global demand.

     The diffusion index of overseas excess demand minus excess supply stood at

+4 in September, unchanged from +4 in June.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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