REPEAT:MNI INSIGHT: BOJ Watching Trade Row, Rising Cost Impact

--June Tankan Shows Less Upbeat Sentiment, Solid Capex Plans

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials see only a limited direct impact of

U.S. trade disputes on global demand and business sentiment so far in the bank's

latest survey but they will keep a close watch on how things will evolve on the

trade front and whether rising costs will continue squeezing profits, MNI

understands.

     The BOJ's quarterly Tankan survey for June released on Monday showed the

diffusion index for sentiment among major manufacturers posted the second

straight quarter-on-quarter drop, falling to +21 in June from +24 in March, hit

by higher energy, raw material and labor costs as well as concerns over global

demand.

     The index is projected to be unchanged at +21 in September. The June index

level of +21 was the lowest since June 2017, when it was at +17.

     The Tankan showed that "the impact of the trade issues on business

sentiment and plans was limited but uncertainty over future businesses is high,"

said a person who is familiar with the BOJ's economic assessment.

     --SOLID CAPEX PLANS

     BOJ officials were heartened by solid capital investment plans by both

smaller and major companies for fiscal 2018 began, but they are paying attention

to the risk that companies may delay implementing their capex plans amid

uncertainty over global demand.

     Plans to invest in equipment by major firms, the key to a sustained

recovery in domestic demand, are projected to rise 13.6% on year in the current

fiscal year, revised up from +2.3% in March and above the MNI survey median

economist forecast for a 9.4% rise.

     Capex plans by smaller firms are expected to fall 11.8% in fiscal 2018,

also revised up from -16.8% in March and firmer than the MNI survey median

forecast of -13.8%.

     The levels of capital investment plans by both major and smaller firms are

above their historical averages.

     --PRICE HIKES INTACT

     Despite the slight worsening of business sentiment, BOJ officials judge

that companies are still trying to raise prices, although at a slow pace.

     The index for input prices (costs) among major manufacturers rose to +30 in

June from +26 in March while the index showing output (sales) prices among major

manufacturers rose slightly to +5 from +4 in March.

     This means that companies remained cautious about jacking up retail prices

amid sluggish consumer spending, although they continued to face rising costs

that have led to lower profit projections among some sectors.

     --SOLID OVERSEAS DEMAND

     The Tankan showed that companies didn't see overseas supply and demand

conditions for products worsened, indicating the U.S. trade rows with major

economies have not led to a slump in global demand.

     The diffusion index of overseas excess demand minus excess supply stood at

+4 in June, unchanged from +4 in March.

     Global demand for Japanese automobiles, electronics and machines has been

strong but it is uncertain how the U.S. plan to impose tariffs on a wide range

of Chinese imports and China's retaliatory action will slow down world trade.

     --LABOR SHORTAGES CONTINUE

     BOJ officials expect upward pressure on wages to increase as the Tankan

showed a continued tight labor supply, although it eased slightly at the start

of the fiscal year when many firms bring in new comers.

     The employment index -- based on reports of excess employment minus those

citing insufficient employment -- improved to -32 in June among all firms, up

from -34 in March.

     The employment index for smaller firms improved to -35 in June from -37 in

March but the DI is expected to slip to -40 in September.

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