REPEAT:MNI INSIGHT:BOJ Tankan Points To Growth, Price Pressure

Repeats Story Initially Transmitted at 03:25 GMT Oct 2/23:25 EST Oct 1

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan's September Tankan survey released Monday

showed that the virtuous circle from profits to investment in the corporate

sector is continuing to work and that a moderate economic expansion remains

intact, BOJ officials believe.

     The Tankan survey also showed that manufacturers continue to face rising

costs from labor shortages and higher import prices, exerting pressure on them

to raise producer prices. The benefit of the yen's depreciation -- supporting

exporter profits -- still appears to be exceeding its cost -- pushing up import

prices, BOJ officials believe.

     The diffusion index (DI) for sentiment among major manufacturers rose to a

10-year high of +22 in September from +17 in June, coming in stronger than the

MNI median economist forecast of +18 and exceeding all 15 analysts' forecasts in

an MNI survey. The September level is the highest since September 2007, when it

was at +23.

     The index will slip to +19 in December, firms projected.

     The diffusion index is calculated by subtracting the percentage of

companies reporting deteriorating business conditions from the percentage of

those reporting an improvement. A positive figure indicates the majority of

firms see better business conditions.

     BOJ officials are encouraged by improving sentiment among automakers and

machine makers, the latter of which are backed by solid demand for capital

investment both domestically and abroad. The improvement is expected to lead the

modest economic recovery.

     The Tankan also showed improvement in both domestic and overseas supply and

demand conditions, although uncertainty over global demand remains.

     The index for overseas supply and demand conditions for products among

major manufacturers rose to zero from -2 in June. The index for domestic supply

and demand conditions for products among major manufacturers also rose, to -5

from -6 in June.

     On the downside, the Tankan showed the number of companies that are

suffering from higher energy and labor costs increased from three months

earlier. Those firms have not fully raised the prices of their goods and

services to compensate.

     BOJ officials believe the pressure on firms to raise prices to reflect

higher costs is building, which in turn will contribute to pushing up consumer

prices toward the BOJ's 2% inflation target from under 1% at this point.

     They also think that unless firms pass higher costs into their sales

prices, corporate profits will be squeezed, which would make firms more cautious

about implementing capital investment and raising wages.

     The index showing output prices among major manufacturers improved to zero

in September from -1 in June, meaning the number of firms that had difficulties

in raising prices decreased slightly.

     On the other hand, the index for input prices among major manufacturers

rose to +14 from +13, meaning the number of firms that are suffering from higher

costs increased.

     BOJ officials are also focused on whether the tightening labor supply will

lead to higher wages and consumer prices.

     In the September Tankan, the employment indexes -- based on reports of

excess employment minus those citing insufficient employment -- were at the

lowest levels since February 1992 for firms in all industries, both large and

small, underscoring the continued tightening of labor supply.

     Capital investment plans by major firms were revised down to +7.7% in

September from +8.0% in June. But this does not worry BOJ officials too much, as

the pace of increase in planned capital investment is still above the historical

average.

     Capital investment plans by smaller firms were revised up to -14.1% from

-20.6% in June, as largely expected.

     At its next policy meeting Oct. 30-31, the BOJ board will digest the Tankan

results and other indicators, which have shown a pickup in exports and factory

output as well as slower consumer spending after a surge in the April-June

quarter. At the meeting, it will update its medium-term outlook for growth and

inflation through March 31, 2020.

     BOJ officials will also look at the Tankan results on business inflation

expectations, due out Tuesday. The focus is on whether corporate inflation

expectations rose for the second consecutive quarter.

     Continuous improvement in the survey would prompt the board to upgrade its

assessment of inflation expectations in the quarterly Outlook Report that it

will release Oct. 31. The previous assessment in July was that inflation

expectations "have remained in a weakening phase."

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com