MNI INSIGHT: BOJ Worries Weak Yen to Hit 2022 Services Capex

Bank of Japan officials are concerned that the longer the yen remains under pressure and energy prices high, the less likely service sector firms will be to invest as the economy re-opens from the pandemic, MNI understands.

While the weaker yen benefits larger exporting manufacturing firms and drives their investment, non-manufacturing firms are seeing profits squeezed from worsening terms of trade.

A February slide in service sector core machine orders suggests to BOJ economists that capex spending is slowing and the ‘virtuous cycle’, closely watched by Governor Haruhiko Kuroda and other officials, weakening.

BOJ SIDELINED

Kuroda, who has long maintained that the effect of a weakening yen is an overall net positive for the Japanese economy, has recently warned that the pace of depreciation may be excessive. But officials are reluctant to consider adjusting the 0.25% upper limit of the BOJ’s yield target for 10-year bonds, their most effective policy tool for targeting currency weakness, in case it saps the economic recovery.

Core orders by non-manufacturers, excluding ships and electrical utilities, known to be volatile but also a leading indicator of capex 6-9 months out, fell 14.4% m/m in February, the latest available data. Overall machinery orders fell 9.8% in February, the biggest one-month decline since April 2020.

Recent data, including the March Tankan survey, has shown weaker investment plans – but in normal years, the BOJ would expect to see these revised higher as the financial year gets going, particularly by smaller non-manufacturers.

According to the Tankan, smaller non-manufacturers said capex was expected to fall 16.9% y/y this fiscal year, above the historical average for Q1 outlooks but below initial forecasts in both FY 2020 and 2021