–Manufacturers Seen Cautious Amid Global Slowdown, Elevated Costs
–Govt Tourism Program, Eased Covid Rules Continue Propping Up Services
–Business Confidence for June Seen Mixed with Slight Changes from March
–Large Firms’ Capex Plans Expected to Show Solid Start to Fiscal 2023
–Small Firms Tend to Have Conservative Plans at Start of Fiscal Year
By Max Sato
(MaceNews) – The Bank of Japan’s quarterly Tankan business survey is expected to show confidence among major manufacturers in Japan drifted lower for the fifth straight quarter in March amid global slowdown and high producer costs while the Japanese government’s travel discount program and eased Covid border control appears to be supporting sentiment among service providers.
Looking ahead, industries are expected to be generally cautious about their business climates in the short term. Sentiment among manufacturers is likely to be little changed and non-manufacturers are seen less optimistic.
The BOJ will release the results of the Tankan survey conducted from late February through the end of March at 0850 JST on Monday, April 3 (1950 EDT/2350 GMT Sunday, April 2).
Many firms are believed to have returned their responses by mid-March, when consumers were traveling and eating out more freely, having seen the drag from the eighth wave of the pandemic ease off from its peak in January. The government lifted its long-held face-covering public health mandate in March but many people continue wearing masks at workplaces and in other closed spaces.
The survey is expected to show large firms have solid plans for investment in equipment for fiscal 2023 starting on April 1 while smaller firms see a decline at the initial stage, as usual, before revising up their plans later in the fiscal year. Capex is supported by demand for automation amid labor shortages in some sectors as well as government-led digital transformation and emission control.
The BOJ will analyze this and other pieces of data ahead of its next policy meeting on April 27-28, at which the bank is expected to leave its easing stance unchanged in a unanimous vote to continue supporting the economy’s recovery from the pandemic-caused slump and achieve stable 2% inflation that comes with substantial wage growth. Japan’s output gap has been in negative territory since the last quarter of 2019, by 2.0 percentage points in the latest estimate by the Cabinet Office.
Manufacturers’ Sentiment Seen Down, Non-Manufacturers Holding Up
The Tankan diffusion index showing sentiment among major manufacturers is forecast at 3 in March, down from 7 in December, 8 in September, 9 in June, 14 in March 20022 and 18 in both December and September 2021, when it rose from 14 the previous quarter. The Tankan index measuring sentiment among major non-manufacturers is seen improving slightly to 20 from 19 for December and following 14 in September, 13 in June, 9 in both March 2022 and in December 2021.
The sentiment index for smaller manufacturers is forecast at -6 (minus 6) in March, down from -2 in December and following -4 in the previous three quarters and -1 in December 2021. The index for their non-manufacturing counterparts is seen at 6 in March, unchanged from 6 in December but up from 2 in September, -1 in June, -6 in March 2022 and -4 in December 2021.
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.
Major Firms Seen Showing Solid Capex Plans
Major firms are projected to show their plans for business investment in equipment will rise a combined 3.2% on the year in fiscal 2023 ending in March 2024, a solid figure despite weaker global demand and concerns about banking failures in the U.S. and Europe. Smaller firms are expected to forecast their combined capital spending will drop 10.7% in fiscal 2023, providing conservative plans at the start of the new fiscal year as they usually do. They tend to revise up their plans later in the year.
For fiscal 2022, large firms are expected to revise down their plans for business investment to a combined 14.0% increase from a 19.2% rise projected in December. That pace would be still high, compared to a 2.3% drop in fiscal 2021. Smaller businesses are likely to report their capex plans for fiscal 2022 will rise by a combined 5.0% from the previous fiscal year, revised up from a 3.8% rise planned in December. Their combined capital investment increased 6.2% in fiscal 2021.
Short-Term Sentiment Outlook Seen Mixed with Slight Changes
Looking three months ahead, major manufacturers expected by economists to project their sentiment will edge up to 4 in June from an expected low figure of 3 in March while major non-manufacturers are forecast to report their sentiment will slip back to 18 after an expected slight improvement to 20.
Economists expect smaller manufacturers to project their June sentiment index will be unchanged at -6 while smaller non-manufacturers are expected to report their sentiment will decline to 2 from an expected March figure of 6.
Companies are faced with elevated costs and labor shortages as well as slower demand from overseas. Consumers are also trimming some spending amid rising costs for food, beverages and some durable goods as many firms are still trying to pass high producer and import costs onto customers.
Producer inflation in Japan remains high but eased to 8.2% in February from 9.5% in January as the government is trying to cap sharp increases in energy costs while fuel and lumber prices fell at a faster pace amid slowing global demand.
BOJ Also Watching Corporate Inflation Expectations
The focus is also on whether corporate inflation expectations are still rising or stabilizing toward the BOJ’s 2% inflation target.
In the December Tankan, major manufacturers on average forecast an annual inflation rate of 2.3% a year from now (vs. 2.2% in the previous survey), 1.7% in three years (vs. 1.6%) and 1.6% in five years (vs. 1.4%). Large non-manufacturers expect inflation at 2.0% in a year (vs. 1.8% in September), 1.5% in three years (vs. 1.4%) and 1.4% in five years (vs. 1.3%).
In its quarterly Outlook Report issued in January, the BOJ said risks to economic activity are “skewed to the downside” for fiscal 2022 and 2023 but are generally balanced for fiscal 2024. It maintained its recent assessment that risks to prices are “skewed to the upside.”
In the report, the BOJ board projected that the year-on-year increase in the core consumer price index (excluding fresh food) would slow to 1.6% in fiscal 2023 from an expected 3.0% rise for fiscal 2022 as the base effects of the current spike in energy and commodities prices fade. For fiscal 2024, the board expects the core CPI to rise 1.8%, noting the impact of government subsidies to cap retail gasoline and utility prices will wane.