BoJ monetary policy: still depends largely on data and market trends

The September Tankan suggests that companies are concerned about the implications of weaker external demand, particularly in emerging markets. The survey also reveals a contrasting picture between external demand and domestic demand, which appears to be holding up relatively well, based on improving business sentiment among nonmanufacturers and other indicators. 

Another takeaway from the September Tankan is that companies continue to revise up capex plans. While an economic slowdown in emerging markets, particularly China, presents a risk to Japanese companies, there are three factors providing a cushion that has prevented companies so far from having to cut back their capex plans: (1) company earnings are at record levels, (2) the supply/demand gap has tightened further as companies pare down excess capacity and as labor supply contracts, and (3) while emerging economies are losing momentum, there are expectations of economic recovery in developed markets such as the US and Europe. This suggests that the mechanism for economic recovery emphasized by the BoJ, whereby stronger company earnings translate into healthier capex, wages, and consumer spending, is still in play.

It is still difficult to say, however, whether current conditions call for further monetary policy action by the BoJ. August industrial output data released on 30 September suggest that Japan's real GDP in Jul-Sep 2015 is likely to either be flat qoq or show only a slight increase. This would require the BoJ to revise its current outlook for an economic rebound from the Jul-Sep quarter. Assuming the BoJ recognizes that Japan's economic recovery has been delayed by external factors (the economic slowdown in China and other emerging markets), the question is will it (1) maintain its stance that the economy is heading for a recovery, based on the view that the mechanism of income growth leading to growth in spending is still in place, and that the US economy is recovering, or will it (2) take the view that the risk of continued economic stagnation has increased, as the impact of the slowdown in emerging economies flows over into the domestic economy. The lack of any more improvement in the output price DI is also likely to concern the BoJ, which has been counting on further improvement in inflation expectations.