–Major Non-Manufacturers’ Confidence Up for 7th Straight Quarter
–Many Sectors Expect Pullback in March in Payback for Recent Improvement
–Large Firms’ Combined Fiscal 2023 Capex Plans Revised Down Only Slightly; Small Firms Raise Theirs Further
By Max Sato
(MaceNews) – Confidence among manufacturers and non-manufacturers in Japan all picked up more than expected in December on improved supply chains, a bottoming chip market and falling import costs after a sharp improvement in September, but many industries are cautious about their near-term outlook amid slowing global growth and widespread domestic labor shortages, the Bank of Japan’s quarterly Tankan business survey released Wednesday showed.
The Tankan diffusion index showing sentiment among major manufacturers posted its third straight quarterly increase in December, led by non-ferrous metal producers, general machinery makers and the auto industry. It climbed to 12 from 9 in September, when it rose from 5 in June and 1 in March. It was above the median forecast of 10 (forecasts ranged from 7 to 12) and the highest since 14 in March 2022 but below the recent peak of 18 seen in both December and September 2021.
Restaurants, hotels, retail stores and some other service providers continued benefiting from widely eased Covid public health restrictions, which have supported traveling and eating out as well as spending by foreign visitors, which has recovered to pre-pandemic levels.
The index measuring sentiment among major non-manufacturers marked its seventh consecutive quarterly improvement, led by real-estate firms, telecommunications service providers and the hotels/restaurants category. It rose to 30 in December from 27 in September, when it climbed to a 32-year high (the best reading since 33 in December 1991) from 23 in June. It was above the median forecast of 28 (ranging from 27 to 30) and remains the highest since 33 in December 1991.
Major firms projected their plans for business investment in equipment would rise a combined 13.5% on the year in fiscal 2023 ending in March 2024, revised down only slightly from the 13.6% increase planned in the September survey but still higher than a modest 3.2% rise planned in March. The median forecast was a 12.7% increase (forecasts ranged from 11.8% to 13.0% gains).
Smaller firms revised up their combined capital spending plans further to a 10.3% rise in fiscal 2023 after jacking them up to an 8.0% rise in September from a 2.4% increase planned in June and an unusually bullish 1.4% rise projected in March. It was also above than the consensus forecast of a 9.2% increase (ranging from 8.5% to 10.7% gains). Small businesses tend to forecast a decline at the start of the new fiscal year and revise up their plans later in the year.
Japan’s output gap slipped back into negative territory in the third quarter after turning slightly positive in the second quarter and previously staying negative for three and a half years.
Other details from the BOJ Tankan conducted from Nov. 9 until Dec. 12.
* Many firms are believed to have returned their responses by late November. By then, preliminary GDP data had been released, showing that Japan’s economy posted its first contraction in three quarters in July-September, down 0.5% on quarter, or an annualized 2.1%, as private inventories plunged, net exports slipped after a sharp rebound in April-June, public works spending slowed, pent-up demand for eating out and traveling waned and firms turned cautious about capital investment. Last week the figures were revised down to 0.7% contraction (annualized 2.9%) and it is now the first contraction in four quarters due to annual revisions.
* 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.
* Looking three months ahead, major manufacturers expect their sentiment to fall back to 8 (just below the median forecast of 9) in March from 12 in December while major non-manufacturers forecast their sentiment will slip to 24 (the median forecast was 26) after the latest improvement to 30 from 27.
* Lumber and wood product makers continue to foresee a sharp decline in the March quarter while automakers and food and beverage producers expect a pullback after the recent improvement. Steel mills and pulp and paper makers also see sharp drops after modest gains. Among non-manufacturers, real-estate firms expect to give up all the gain made in December. Hotels and restaurants remain cautious about their outlook, forecasting a sharp drop in March sentiment. Electricity and gas utilities also anticipate a sharp drop after a jump in September and a modest rise in December.
* The sentiment index for smaller manufacturers stood at 1 (plus 1) in December, up from -5 (minus 5) in September. It was above the median forecast of -4 (minus 4) and the first positive reading since 6 (plus 6) in the March quarter of 2019.
* The index for their non-manufacturing counterparts posted the seventh consecutive improvement in December, rising to a 32-year high of 14 from 12 in September and coming in firmer than the median forecast of 12. It is the best reading since 21 in September 1991.
* Smaller manufacturers expect their March sentiment index to be at -1 (minus 1), down from 1 (plus 1) in December (the median economist forecast was minus 6) while smaller non-manufacturers expect their sentiment to slump to 7 from 14 in December (the median forecast was 9).
Large Firms See Inflation Below BOJ’s 2% Target in Longer Term
* Major manufacturers on average forecast an annual inflation rate of 2.1% a year from now (2.1% in the previous survey), 1.8% in three years (1.8%) and 1.6% in five years (1.7%). Large non-manufacturers expect inflation at 2.0% in a year (2.0% previously), 1.6% in three years (1.6%) and 1.4% in five years (1.5%).
Firms Continue to Expect Higher Dollar, Euro Vs. Yen in Fiscal 2023
* In the December quarter Tankan survey, Japanese firms assumed the dollar/yen exchange rate to average at ¥139.35 for fiscal 2023, up further from ¥135.75 provided in September, while assuming the euro/yen forex rate to average at ¥148.80, also up further from ¥144.62 seen three months ago.
* The interest rate differential between the U.S. and Japan remains relatively wide as investors look for higher returns, weighing on the yen. However, the rate gap has narrowed slightly, capping the dollar’s gain, in light of speculation that the Bank of Japan is considering lifting the negative interest rate on the short end after having allowed the 10-year bond yield to rise to around 1% from its target of “around zero.” The Federal Reserve has paused in its current tightening cycle and market participants are looking at rate cuts next year.