MNI INSIGHT: Tankan Underpins BOJ Recovery Scenario, But Risks

--Solid Capex Plans Ease Risk Of Imminent Economic Downturn

By Hiroshi Inoue

     TOKYO (MNI) - Although sentiment indicators fell, the latest Bank of Japan

Tankan survey highlighted that firms intend to keep up their investment plans in

the coming year, underpinning the central bank's outlook for a recovery in or

around Q2 2020, although officials at the Bank are still concerned capex

spending could fall if the global slowdown continues, MNI understands.

     However, the results of the survey will likely provide the BOJ with the

opportunity to keep policy unchanged when they meet next week.

     BOJ Deputy Governor Masayoshi Amamiya said on Thursday that he is

optimistic about the outlook for the sustainability of domestic demand, mainly

capital investment, saying it remains solid but the impact of weak exports and

slowing production is impacting on some manufacturers

     However, Amamiya warned, "If firms have to keep paying attention to risks

concerning the global economy for a prolonged period, it could take longer than

expected for their fixed investment stance to become active again."

     Another bright spot in the Tankan for BOJ officials was the modest

downgrade in sentiment levels at Japan's non-manufacturing firms -- a central

pillar supporting the domestic economy.

     The December Tankan survey showed business sentiment, mainly amongst

manufacturers, fell to zero from +5 in September, with the major

non-manufacturers index falling to +20 from +21 in September. The overseas

diffusions index measuring excess supply over excess demand fell to -12 from -8

in September.

     --SOLID CAPEX PLANS

     Despite a dip in sentiment, there was little sign that slowing global trade

weighed heavily on investment spending, with capex plans by both major and

smaller firms above average levels.

     Major firms intend to increase investment by 6.8% in FY2019, stronger than

the MNI median forecast of a 6.0% rise. Smaller firms' plans show investment

down 2.2%, above the MNI median forecast of -2.9%. Being more nimble, smaller

firms' capex plans tend to be revised higher towards the end of the year.

     The Tankan showed that ongoing trade friction on business sentiment among

non-manufacturers was limited and their business plans remained solid.

     The survey also saw the diffusion index for employment conditions eased

slightly from three months ago but it showed that firms continue to suffer from

labor shortages, indicating the tightness of labor conditions continued.

--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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