MNI POLICY: BOJ Eyes Orders Amid Tighter Global Conditions

Bank of Japan (BOJ) officials are concerned high levels of order backlogs for automobiles and capital goods are not sustainable and may present risks, as overseas economic conditions tighten, MNI understands.

The officials are also more focused on the outlook for industrial production than private consumption, which remains resilient. Overseas markets typically have a greater impact on the country's production and exports during times of heightened financial volatility.

When slowdowns in overseas economies intensify, or the timing of their recovery is delayed significantly, exports of automobiles and capital goods may decline rapidly due to cancellations of orders, the BOJ noted. While this has not materialised, bank officials say there is a need to examine the risk more closely, especially in the wake of the collapse of U.S. regional banks. Commercial banks have become cautious taking exposure to business loans, making it harder for companies to raise funds and putting downward pressure on investment.

The BOJ in January lowered its assessment on industrial production –a key input used to measure economic recovery – and exports following weak data. The central bank is focused on whether exports and production will gain momentum and order backlogs for automobiles and capital goods will be sustained in or after Q2.

Bank officials are also encouraged by solid wage hikes at major manufacturers this fiscal year. The BOJ's focus now shifts to how smaller firms that have not sufficiently transferred high costs to prices can do the same. The government will publish in early August data on small-company wage hikes made in or after June. Bank officials will also focus on revised wage data released by the Japanese Trade Union Confederation, or Rengo, to understand smaller firms’ wages before the release of the government wage data.

The BOJ March Tankan showed the slowing global economy and increasing commodity prices drove Japanese benchmark business sentiment lower over the previous quarter – the fifth consecutive quarterly fall. But sentiment among major non-manufacturers, mainly face-to-face services, improved for the fourth straight quarter as economic activity – such as inbound tourism – resumed.

The diffusion index for sentiment among major manufacturers stood at +1 in March, down from +7 in December, the lowest level since December 2020. The index is projected to rise to +3 in June. However, the Tankan results did not include the impact of financial turmoil caused by the collapse of U.S. regional banks and tightening financial conditions overseas.