MNI INSIGHT: GDP Confirms BOJ Expectations For Capex, Spending

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials see red-hot second-quarter GDP growth

data as simply confirming their conviction that Japanese consumption and

business investment are undergoing a continuous, gradual improvement.

     They are sticking to their view that the domestic economic recovery remains

modest while inflation is taking time to pick up.

     "Private consumption and capital investment were strong. But (the BOJ)

expected to see such strong figures, judging from its Consumption Activity Index

and the government's industrial shipments data indicating capital investment,"

said a person familiar with BOJ thinking.

     The person underlined that Q2 data confirmed the BOJ's expectations. 

     Japan's economy for the April-June quarter posted strong growth of 1.0% on

quarter, or an annualized 4.0%, as strong domestic demand -- led by consumption,

business investment and public investment -- offset what is seen as a temporary

slip in external demand.

     It was much stronger than the MNI median economist forecast for +0.7% q/q,

or an annualized +2.6%. The sixth straight quarterly expansion in GDP followed a

revised 0.4% rise on quarter, or an annualized +1.5%, in January-March. The Q2

growth was well above the potential growth rate estimated by the BOJ as

somewhere between 0.5% and 1%.

     Despite the strong Q2 GDP data, the BOJ is maintaining its cautious view on

inflation, believing it will take some time for the impact of stronger economic

activity to filter through to consumer prices, said another person familiar with

BOJ thinking.

     This person added that the central bank's focus is on how much momentum

private consumption will gain given continued moderate increases in income, and

how this will affect inflation in coming months.

     The GDP data show that private consumption, which accounts for about 60% of

GDP, posted the sixth straight quarterly rise in Q2, backed by a modest recovery

in average wages amid a tight labor supply and stable fresh food prices. Private

consumption rose 0.9% on quarter in Q2 after rising 0.4% in Q1, coming in

stronger than the median MNI economist forecast for +0.5%. It pushed up the Q2

GDP by 0.5 percentage point.

     However, consumption still lacks strength as wage growth remains slow. 

     Last week, the BOJ said its supply-side Consumption Activity Index rose

1.1% on quarter in April-June,  the second straight rise following a 0.8% gain

in January-March. The index posted the highest growth since the first three

months of 2014, when it rose 1.8% on a rush to spend before the sales tax rate

was raised to 8% from 5% in April that year.

     The April-June GDP data also show business investment rose 2.4% on quarter,

coming in above the median MNI economist forecast for +1.4% and posting the

third straight quarterly rise. The pace of growth accelerated sharply from a

0.9% gain in Q1, pushing up Q2 GDP by 0.4 percentage point.

     Last month, June industrial production data released by the Ministry of

Economy, Trade and Industry showed that shipments of capital goods excluding

transport equipment -- a key indicator of the business investment component of

GDP data -- rose 4.8% on quarter in April-June, the first rise in two quarters.

     Some firms are seeking to raise production capacity to meet higher demand

while others are trying to cope with labor shortages by investing in machines,

economists and government officials have said.

     The BOJ's quarterly Tankan business sentiment survey continues to show

solid capital investment plans in the current fiscal year, and BOJ economists

are watching closely how firms actually implement those plans amid uncertainty

over global demand.

     In June, the BOJ upgraded its assessment of private consumption, which

accounts for about 60% of total domestic output, saying it "has increased its

resilience" in light of improving employment and income conditions. Previously

it said that consumer spending was "resilient."

     However, both BOJ and government officials have been urging companies with

record profits to share more wealth with workers or invest in innovative areas,

instead of hoarding cash. 

     On the price front, upstream cost increases have not filtered through to 

downstream prices.

     The BOJ's corporate goods price index, the key indicator of domestic

producer prices, rose 2.6% on year in July, with the pace of increase

accelerating from the 2.2% gain posted in June, led by higher costs for fuels,

steel and metals.

     At the retail levels, however, government data showed that Japan's national

average core CPI (excluding fresh food but including energy prices) rose 0.4% on

year in June, in line with economists' forecasts, after rising at the same rate

in May.

     Excluding the upward pressure from energy prices, the underlying price

trend has shown only a very slow improvement. The CPI excluding fresh food and

energy (the core-core CPI) was unchanged on year in June, after being flat in

May and April and falling 0.1% in March.

     It its latest quarterly Outlook Report released last month, the BOJ said

that the core CPI was "in the range of zero percent to 0.5%."

     "Inflation expectations have remained in a weakening phase," it said,

adding, "The momentum toward achieving the 2% price target is being

maintained... but it isn't yet sufficiently firm."

     At its latest policy meeting on July 19-20, the BOJ board decided to leave

its monetary policy unchanged in a seven-to-two vote. The BOJ retained the yield

curve control target, while pushing back its estimate for achieving its 2%

inflation target by a year until "around fiscal 2019." It was the sixth delay

since the central bank launched aggressive easing in April 2013.

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

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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