MNI POLICY: Weaker Capex Plans To Pressure BOJ Board
MNI (TOKYO) - Weaker-than-expected capital investment plans that deviate strongly from the historical average within the Bank of Japan’s March Tankan survey will pressure the Board to delay further hikes this year, MNI understands.
BOJ officials will study the survey results due April 1 to gauge the impact of the labour shortage and global uncertainty on business investment. Capex plans significantly lower than the historical average will increase concern for the Japanese economy and risk the BOJ’s smooth rate-hike plans.
While the BOJ has not provided forward guidance – and there is growing internal disagreement about the pace of inflation – the market expects the next hike by September, following January’s 25 basis point increase to 0.5%. (See MNI POLICY: BOJ Fails To Reach Inflation, Wages Agreement)
Past surveys have shown strong capex plans, supporting the BOJ’s positive outlook for income and spending, and despite implemented investment typically underperforming.
In addition to capex plans, bank officials are also focused on whether private consumption will remain firm amid rising nominal wages or lose momentum on the back of increasing prices.
FINANCIAL MARKETS
While Bank officials believe stable U.S. and Japanese stock markets will support capex plans, they are watching equities – particularly the Nikkei 225 – and corporate-bond issuance spreads to gauge the global impact of American tariffs and whether they weaken local capital investment and exports.
A weaker Nikkei would also worsen corporate and consumer sentiment, slowing the economy’s momentum.
The BOJ maintains it will gradually raise the policy interest rate if the economy and inflation move in line with forecasts, while monitoring risks. Bank officials believe the danger of falling behind the curve is small and do not see the need to rush rate hikes as y/y inflation growth will likely slow in or after mid-year.