MNI INSIGHT: BOJ Tankan Increases Concern Over Virtuous Cycle

The Bank of Japan's December Tankan business sentiment survey showed that businesses are more cautious about implementing capital investment, increasing concerns over a pause in the virtuous economic cycle, MNI understands.

The downward revision of capital investment plans by major firms may have been beyond the level predicted by Bank of Japan officials, who had expected to see a smaller downward revision of capex or even a small upward revision.

There was hope that capex plans would be revised higher as the drop in corporate profits in the fourth quarter eased from the third quarter and business sentiment improved from three months ago.

WEAKER CAPEX

The Tankan showed that capex sentiment by major firms was -1.2%, revised down from +1.4% in September and weaker than the MNI median forecast of -0.1%.

Capex plans by major firms in December have a tendency to be revised lower from September but the downward revision in this survey was higher than usual and below the historical average.

Capex by major manufacturers was -0.5% y/y in December, also revised down from +3.5% in September. December's -0.5% is the biggest drop since December 2009 when fell -28.2% after the Lehman Brothers collapse.

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 created by the pandemic.

Investment plans including software, research and development were supported by firms' access to financing through schemes supported by the central bank and the government.

However, the latest Tankan showed that demand for this capex might have weakened slightly and BOJ officials are focused on the details of capex plans to be released on Tuesday to address the underlying trends.

The Tankan also showed that the financial position and lending attitudes of financial institutions are both accommodative, supporting the view that the lending facilities by the BOJ and the government continue to produce the intended effects.

HIGHER INFLATION VIEW

BOJ officials were encouraged by the higher inflation expectations of businesses as they were worried that it may be revised lower amid a prolonged weakness in demand.

Longer-term inflation expectations at Japanese firms rose slightly in the three months to December although the one-year outlook was unchanged from the September reading, according to the latest Tankan survey.

On average, companies saw the annual consumer inflation rate at 0.3% in a year from now, unchanged from 0.3% in September. They also saw a 0.7% rise three years out and a 0.9% rise five years ahead, up from +0.6% and +0.8% respectively in the September survey.