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MNI INSIGHT: BOJ Tankan Points To Growth Cycle, Price Pressure

By Hiroshi Inoue
     TOKYO (MNI) - The Bank of Japan's September Tankan survey released Monday
showed that the virtuous circle from profits to investment in the corporate
sector is continuing to work and that a moderate economic expansion remains
intact, BOJ officials believe.
     The Tankan survey also showed that manufacturers continue to face rising
costs from labor shortages and higher import prices, exerting pressure on them
to raise producer prices. The benefit of the yen's depreciation -- supporting
exporter profits -- still appears to be exceeding its cost -- pushing up import
prices, BOJ officials believe.
     The diffusion index (DI) for sentiment among major manufacturers rose to a
10-year high of +22 in September from +17 in June, coming in stronger than the
MNI median economist forecast of +18 and exceeding all 15 analysts' forecasts in
an MNI survey. The September level is the highest since September 2007, when it
was at +23.
     The index will slip to +19 in December, firms projected.
     The diffusion index is calculated by subtracting the percentage of
companies reporting deteriorating business conditions from the percentage of
those reporting an improvement. A positive figure indicates the majority of
firms see better business conditions.
     BOJ officials are encouraged by improving sentiment among automakers and
machine makers, the latter of which are backed by solid demand for capital
investment both domestically and abroad. The improvement is expected to lead the
modest economic recovery.
     The Tankan also showed improvement in both domestic and overseas supply and
demand conditions, although uncertainty over global demand remains.
     The index for overseas supply and demand conditions for products among
major manufacturers rose to zero from -2 in June. The index for domestic supply
and demand conditions for products among major manufacturers also rose, to -5
from -6 in June.
     On the downside, the Tankan showed the number of companies that are
suffering from higher energy and labor costs increased from three months
earlier. Those firms have not fully raised the prices of their goods and
services to compensate.
     BOJ officials believe the pressure on firms to raise prices to reflect
higher costs is building, which in turn will contribute to pushing up consumer
prices toward the BOJ's 2% inflation target from under 1% at this point.
     They also think that unless firms pass higher costs into their sales
prices, corporate profits will be squeezed, which would make firms more cautious
about implementing capital investment and raising wages.
     The index showing output prices among major manufacturers improved to zero
in September from -1 in June, meaning the number of firms that had difficulties
in raising prices decreased slightly.
     On the other hand, the index for input prices among major manufacturers
rose to +14 from +13, meaning the number of firms that are suffering from higher
costs increased.
     BOJ officials are also focused on whether the tightening labor supply will
lead to higher wages and consumer prices.
     In the September Tankan, the employment indexes -- based on reports of
excess employment minus those citing insufficient employment -- were at the
lowest levels since February 1992 for firms in all industries, both large and
small, underscoring the continued tightening of labor supply.
     Capital investment plans by major firms were revised down to +7.7% in
September from +8.0% in June. But this does not worry BOJ officials too much, as
the pace of increase in planned capital investment is still above the historical
     Capital investment plans by smaller firms were revised up to -14.1% from
-20.6% in June, as largely expected.
     At its next policy meeting Oct. 30-31, the BOJ board will digest the Tankan
results and other indicators, which have shown a pickup in exports and factory
output as well as slower consumer spending after a surge in the April-June
quarter. At the meeting, it will update its medium-term outlook for growth and
inflation through March 31, 2020.
     BOJ officials will also look at the Tankan results on business inflation
expectations, due out Tuesday. The focus is on whether corporate inflation
expectations rose for the second consecutive quarter.
     Continuous improvement in the survey would prompt the board to upgrade its
assessment of inflation expectations in the quarterly Outlook Report that it
will release Oct. 31. The previous assessment in July was that inflation
expectations "have remained in a weakening phase."
--MNI Tokyo Bureau; tel: +81 90-2175-0040; email:
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email:
--MNI BEIJING Bureau; +1 202-371-2121; email:

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