MNI INSIGHT: Weak Inflation View May Dampen Capex, BOJ Worry

Bank of Japan officials are keeping watch on inflation expectation indicators and are concerned that any decline will prompt a fall in corporate capital expenditure as businesses delay projects, MNI understands.

Inflation expectations are expected to have fallen in recent months, with bank economists forecasting them to continue at weaker levels and possibly even decline further in Q3.

Although both exports and private consumption in Japan are predicted to remain firm, a fall in capital expenditure could slow any recovery.

Both exports and industrial production rebounded in July after declines in Q2 but their levels are still far below those seen pre-Covid.

TANKAN SURVEY

Bank officials expect capital investment plans to be revised down in the September Tankan survey, due out on Oct 1, and they will be looking at how far the predicted numbers are below historical averages.

Capital investment linked to research and development will remain solid, but it's a different story for non-manufacturers, particularly the accommodation and hospitality sectors that have been hardest hit by the coronavirus.

Low inflation expectations alongside weak growth expectations will dampen corporate appetite to implement capital investment, the BOJ worry.

There hasn't yet been much evidence that firms have reduced their prices to stimulate demand as during previous periods of slowdown, but the BOJ are keeping a close watch on developments.