MNI INSIGHT: Slowing Sentiment, Spending Could Hit BOJ Outlook

--Weak Sentiment Data Indicates Spending May Lose Momentum

By Hiroshi Inoue

     TOKYO (MNI) - Slowing consumer sentiment could soon pressure spending, with

Bank of Japan officials concerned a downturn in consumption levels will hit the

service sector, turning non-manufacturing firms more cautious about implementing

capital investment plans, MNI understands.

     The slowdown in domestic demand would worsen the BOJ'S much-watched

virtuous cycle from income to spending, making it difficult difficult for the

BOJ to maintain its baseline scenario of an ongoing economic recovery.

     The BOJ still believes domestic demand is on an uptrend, with the virtuous

cycle in tact across both the corporate and household sectors. The central bank

recently highlighted a moderate upturn, "albeit with fluctuations, against the

background of steady improvement in the employment and income situation".

     The "fluctuations" include slowing overseas economies, the effects of which

have slowed the manufacturing sector and now threatens non-manufacturers.

     If their outlook is threatened, the BOJ fears a pullback on the investment

plans laid out in the recent Tankan survey, which will impact the domestic

economy that has to date held firm.

     --FIRM CONSUMPTION INDEX

     The BOJ's supply-side Consumption Activity Index fell in May, down a real

0.4% on a seasonally adjusted basis, following an upwardly revised 1.7% gain

(from +1.4%) in April. The index for the April-May period rose 0.8% q/q,

accelerating from 0% in Q1.

     The BOJ's Consumption Activity Index is designed to forecast revised

private consumption and is not a preliminary estimate.

     --WEAK SENTIMENT DATA 

     Recent sentiment data, seen as a leading indicator of real spending, are

casting a shadow over the consumption outlook. However, the BOJ is unlikely to

amend its assessment -- and certainly not policy -- on one or two months of soft

data, as it continues to eye data on a quarter-over-quarter basis.

     The BOJ's latest consumer sentiment diffusion index measuring the current

climate fell 5.8 points to -25.0 in June, a fourth straight quarterly drop

pushing the DI to the lowest level since June 2016. 

     A greater proportion of respondents said sentiment worsened when judging by

income, business conditions and economic data, including recent corporate price

hikes. Sentiment for a year ahead marked the first drop in two quarters, down

5.5 points to -36.1 in June -- the lowest level since September 2012.

     Japan's overall consumer confidence index fell 0.7 points to a seasonally

adjusted 38.7 in June, the ninth straight monthly drop, the latest Consumer

Confidence Survey released by the Cabinet Office showed.

     --HIGHER INFLATION VIEW

     The BOJ survey also showed a growing percentage of respondents expecting

prices to rise over the next 12 months, up at 80.5% in June from 78.7% in March

as concerns over the sales tax hike kick in. Looking five years ahead -- the

BOJ's preferred metric -- 83.4% said prices would rise, up from 82.3% three

months earlier.

--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

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