MNI POLICY: Solid Capex Plans Underpin BOJ Recovery View

--Solid Capex Plans Ease Imminent Economic Downturn Risk 

--Downward Revisions By Major Firms Capex Plans Worry

By Hiroshi Inoue

     TOKYO (MNI) - There were no surprises in the September Tankan survey for

Bank of Japan officials, with the expected deterioration in sentiment coming

through, particularly across the manufacturing sector.

     Also as expected by the BOJ, there were no sharp downward revisions in

capital investment plans, despite the global slowdown and ongoing trade

disputes, which, for now at least, underpins the central bank's outlook.

     There is still a feeling at the BOJ that the capex plans will eventually be

downgraded, particularly if machinery orders and shipments of capital goods

excluding transport equipment weaken in coming weeks.

     Historically, capex plans are downgraded after the September survey, which

marks the end of the first half of the fiscal year and there will be close

scrutiny of the revised plans in the December survey.

     BOJ Governor Haruhiko Kuroda last week pointed to the two key factors

regarding the outlook for Japan's economy; the timing of a pick-up in overseas

economies and whether strong domestic demand is sustained until that time.

     "The sustainability of domestic demand depends on business fixed

investment," he added.

     Kuroda warned, "If the slowdown in overseas economies lasts longer than

expected, it is necessary to pay attention to the possibility that firms'

investment stance will become cautious, mainly in the manufacturing sector."

     The BOJ's September Tankan survey saw business sentiment fall to +5 from +7

in June, with the major non-manufacturers index falling to +21 from +23 in June.

Underlining how global events were affecting domestic growth, the overseas

diffusions index measuring excess supply over excess demand fell to -8 from -7

in June.

     --CAPEX PLANS

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

trade had significantly impacted investment spending, with capex plans by both

major and smaller firms above average levels.

     Major firms intend to increase investment by 6.6% in FY2019, just a little

weaker than the MNI median forecast of a 6.9% rise. Smaller firms' plans show

investment down 6.7%, below the MNI median forecast of -5.8%.

     Being more able to react quickly to changing circumstances, smaller firms'

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

     More heartening for the BOJ was only a small downtick in the diffusion

index of excess demand minus excess supply regarding overseas supply and demand

conditions for products. The DI fell to -8 in September from -7 in June, as

firms didn't see overseas demand falling sharply over the past three months.

     The Tankan showed that the impact of the sustained trade friction on

business sentiment among manufacturers was limited and business sentiment among

non-manufacturers remained solid.

     The BOJ will hold its quarterly branch managers' meeting on Oct. 15 when

they will gather information to gauge any front-loaded rise in demand before the

tax hike.

--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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