MNI INSIGHT: Japan Econ Seen In Soft-Patch; BOJ On Data Watch

--BOJ Concerned 'Virtuous Cycle' At Risk If Capex Stalls

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan will keep its easy policy unchanged this

week, but its becoming increasingly concerned that slowing industrial output and

weaker exports risk impacting their much-watched 'virtuous cycle', the link

between corporate profits and spending.

     Japan's economy is expected to be in a Q1 soft-spot which will likely

extend into Q2, but BOJ officials are awaiting further data before considering

additional easy policy.

     As already noted by MNI in recent weeks, policymakers are unlikely to lower

their overall assessment of the economy, but sluggish data will prompt the board

to consider adjusting their assessment for exports and production, as the first

quarter outturn almost certainly be weak.

     Unless global financial markets destabilize or major corporations' capital

investment plans for FY2019 fall sharply, the central bank is prepared to exert

patience and see if there are signs of a pick-up in Q2 or Q3.

     Overall the BOJ is prepared to wait as it is optimistic that Beijing's

recent moves to stimulate the Chinese economy, a Federal Reserve stepping back

from a tightening path and a cyclical recovery in the IT sector will all help

keep Japan's economy motoring along.

     There is though growing concern about the eurozone economy, with fears the

slowdown could get worse as Brexit, Italy and a possible trade spat with the

U.S. weigh.

     --SOME POSITIVITY

     The BOJ is more upbeat about China, encouraged by the stimulus measures

that will prevent their economy from worsening. Although unsure exactly when

that will feed through into the domestic economy, the BOJ believes it will boost

other Asian countries and be supportive of both Japan's exports and industrial

production.

     Global demand for IT-related goods has fallen, but the BOJ believes

cyclical demand will eventually see increased markets for Japan's sector giants.

     In the short-term BOJ focus is on how domestic demand, such as capex and

household spending holds up amid slowing exports as the global economy stutters.

     Private consumption is unlikely to strengthen significantly, with wage

hikes still muted and consumers haven't been accepted higher prices.

     --CAPEX KEY

     Therefore, continued capital investment is the key to avoid a worsening of

the economy and for the BOJ to hold back on further easy policy.

     The first indication of FY19 spending plans will come with the March Tankan

survey, due for release on April 1, although a clearer view will be seen in the

June update.

     BOJ officials expect the pace of capex increase to be slow-moving, with

spending at non-manufacturers offsetting a slowdown in spending by

manufacturers.

     The BOJ has reservations over the accuracy of the initial Capex plans laid

out in the March survey, but they will take note of how early indications

deviate from historical averages.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: MMJBJI,MAJDS$,MMJBJ$,M$A$$$,M$J$$$,MT$$$$,MX$$$$]