MNI INSIGHT: Upbeat Capex Plans Underpin BOJ Recovery View

--Investment Plans Ease Imminent Economic Downturn Risk

By Hiroshi Inoue

     TOKYO (MNI) - Updated corporate capital investment plans underline the Bank

of Japan's view that the economy is on a moderate recovery path, despite

weakening sentiment after global trade friction picked up across Q2, with

officials anticipating that higher wages will underpin the virtuous cycle

between corporate profits and spending.

     With little sign that capex spending will slow anytime soon, the BOJ will

be able to take stock of the economy at its July meeting and not rush into

further easy policy, although there could be a tweak to the wording of its

forward guidance and the outlook on industrial production.

     With the cut-off point for the latest BOJ Tankan survey earlier in June,

before weekend news that China and the U.S. agreed another truce in the trade

dispute and delaying the imposition of any fresh tariffs, BOJ officials hope it

will be a positive boost for businesses and feed through to consumers.

     The BOJ's June Tankan survey showed business sentiment, mainly amongst

manufacturers, fell to +7 from +12 in March, with the major manufacturers index

falling to +11 from +17 in March. Underlining how global events were affecting

domestic growth, the overseas diffusions index measuring excess supply over

excess demand fell to -7 from -5 in March.

     --CAPEX HOLDS

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

in Q2 dented investment spending, with capex plans by both major and smaller

firms above average levels.

     Major firms intend to increase investment by 7.4% in FY2019, weaker than

the MNI median forecast of a 9.3% rise decline but above the 1.2% rise outlined

in the March '18 Tankan.

     Smaller firms' plans show investment down 9.3%, close to the MNI median

forecast of -9.5% and above the initial plans of -14.9% last March. Being more

able to react quickly to changing circumstances, smaller firms' capex plans tend

to be revised higher towards the end of the year.

     --WAGE GROWTH

     The BOJ expects some upward pressure on wages as the Tankan shows ongoing

tight labour supply, with the employment index at -32 in June among all firms,

improving from -35 in March. The employment index for smaller firms stood at -36

in June, improving from -39 in March. but is expected to slip to -41 in

September.

     The survey's employment DI usually dips in every June after firms go

through an annual round of hiring new workers in April.

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

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