MNI INSIGHT: BOJ Tankan Flags Virtuous Cycle Pause

The Bank of Japan is growing increasingly concerned over the strength of the economic recovery, as weaker than expected capital investment plans by major Japanese companies risks a pause in the favorable cycle from profits to spending, stalling the recovery, MNI understands.

Bank officials had expected capex, which lags both private spending and export orders, to be revised modestly lower, given the sharp decline in corporate profits and the heightened global uncertainties given the pandemic, and the revisions in the September report were largely in line.

According to the BOJ, investment plans, although lowered, were still supported by firms' access to financing through schemes supported by the bank and the government, although there is a growing risk they could be moving into a downtrend.

DECADE LOW

The September Tankan, published Thursday, showed that capex by all firms was expected to fall 2.7% y/, revised down from a 0.8% decline forecast in the June report. That is the lowest forecast level since September 2010 when it stood at -1.0%, although far above the -17.3% seen in September 2009 at the height of the global financial crisis.

The survey showed capex by major firms was expected to rise 1.4% y/y, revised down from +3.2% in the June survey.

The is still a concern at the BOJ that a prolonged impact from Covid-19 would again see a disruption in activity, which would exert further downward pressure on the economy, triggering a vicious cycle from rising unemployment, through to lower incomes and slower spending.

However, for now at least, the BOJ expects capex to at least hold around current expected levels, underpinned by government's and the central bank's lending facilities, despite the coronavirus-triggered downturn being bigger than that during the Lehman Shock, although there remains elevated downside risks while Covis-19 remains unchecked.

The BOJ was heartened by the favorable availability and demand for financing readings in the survey. The diffusion index of corporate finance by all enterprises tight rose to +5 from +3 in June, while the DI of lending attitudes by financial institutions stemming from accommodative minus severe stood at +19 in September, unchanged from June.

WEAKER INFLATION OUTLOOK

BOJ officials were puzzled by the weaker corporate inflation outlook, as in theory they would normally see lowered growth expectations, prompting businesses to mull cancelling or postponing capital investment plans.

Firms on average expect the annual consumer inflation rate at 0.3% a year from now, unchanged from 0.3% in June. They also see a 0.6% rise three years out and a 0.8% rise five years ahead, down from +0.7% and +0.9%, respectively.