MNI INSIGHT: Lingering Supply Chain Gaps Can Alter BOJ Views

Lingering shortages of imported parts and semiconductors for Japanese automobile makers could lead the Bank of Japan to review its long-running language that the economy will pick up "as a trend," MNI understands.

The BOJ would tread cautiously on changing its language of "using the wording 'as a trend'" because markets would take it to mean a deeper worry about the economic recovery timetable, which has already been moved to early next year from the fourth quarter.

Indeed, the BOJ continues to use "as a trend" as bank officials still expect a rebound for automobile exports and production as other economic components, mainly employment and wages remain favourable.

But pressure to avoid overselling the pace of the recovery is growing as major Japanese automakers plan to reduce production this month because of the shortages. This follows deeper drops to production than the BOJ predicted in September.

However, even if auto plants resume operations soon, the sales outlook is uncertain as competition in the automobile industry in Japan, U.S. and Europe is becoming stiffer, the BOJ warns.

RECENT SIGNPOSTS

BOJ officials have routinely said that that supply chain disruptions that started last year for semiconductors and spread to auto parts this year from Southeast Asian countries under lockdowns were temporary and slower exports and production by companies such as Toyota would be transient.

The BOJ also was heartened by a better than expected quarterly Tankan survey with Governor Haruhiko Kuroda repeating the language this week along with the economy entering a virtuous cycle from income to spending.

But also feeding into the downside risk scenario is stubbornly high imported energy costs that can nip at company spending plans and household budgets, raising broader concerns about domestic demand, see" MNI INSIGHT: BOJ Concerned Energy Costs Could Dampen Growth.

The BOJ is already expected to cut its economic growth forecast at its Oct. 27-28 policy review for this fiscal year.

The next look at corporate earnings will come in the MOF survey for the third quarter due out on Dec. 1, with the BOJ keen to understand if profits were weighed down by higher international commodity prices.