–Major Non-Manufacturers’ Confidence Slightly Less Optimistic Than in March but Just Below 32-Year High
–Services Firms Generally More Bearish for September Amid High Costs, Labor Shortages
–Large Firms Revise Up Capex Plans for Fiscal 2024, Smaller Firms See Smaller Drop Than Projected in March
By Max Sato
(MaceNews) – The Bank of Japan’s quarterly Tankan business survey released Monday showed confidence among manufacturers improved slightly or was flat in the June quarter, as the positive effects of resumed vehicle output in March after two months of suspension over safety issue were partly offset by concerns over rising costs, while sentiment among non-manufacturers edged down after recent improvement as post-Covid spending and traveling has waned further.
The Tankan diffusion index showing sentiment among major manufacturers rebounded to 13 in June from 11 in March, when it posted its first drop in four quarters. The increase, led by producers of textiles, refined petroleum products and general machinery, matched 13 in December, which was the highest since 14 in March 2022 but below the recent peak of 18 seen in both December and September 2021. It was just above the median forecast of 12 (forecasts ranged from 9 to 13).
The index measuring sentiment among major non-manufacturers stood at 33, down slightly from a fresh 32-year high of 34 recorded in March, which was the best reading since 41 in September 1991 and the eighth straight quarterly increase. It was in line with the median forecast of 33 (forecasts ranged from 32 to 36). Declines in retailers, hotels and restaurants were largely offset by telecommunications.
The sentiment index for smaller manufacturers was at -1 (minus 1) in June, unchanged from March, when it fell to the level from 2 in December, which was the first positive reading since 6 in the March quarter of 2019. The median forecast was -1 (minus 1), with forecasts ranging widely from -5 (minus 5) to 2. Weakness in non-ferrous metals and refineries over rising costs was offset by gains in business machinery and lumber. Smaller firms in the auto industry turned neutral about their sentiment after having been bearish while large carmakers were slightly less optimistic compared to three months ago.
The index for the small non-manufacturing sector slipped further to 12 after posting its first dip in eight quarters in March, easing to 13 from 14 in December. December’s 14 is the best reading since 21 in September 1991. It was in line with the consensus call of 12 (forecasts ranged from 10 to 16). Better sentiment among telecoms and utilities was offset by slightly less optimistic views among hotels, restaurants and retailers amid labor shortages.
Major firms projected their plans for business investment in equipment would rise a combined 11.1% on the year in fiscal 2024 ending on March 31, 2025, up sharply from a 4.0% increase planned in March amid widespread labor shortages and the need to digitize their operations. It was below the median forecast of a 14.2% increase (forecasts ranged from 8.0% to 16.3% gains).
Smaller firms also raised their combined capital spending plans to a 0.8% decrease in fiscal 2024 after projecting a sharper 3.6% drop in March. It was lower than the consensus call of a slight 0.6% increase, with forecasts ranging from a 4.5% drop to a 4.4% gain. Smaller firms tend to have conservative plans at the start of each fiscal year and revise them up later.
Capex plans are generally supported by demand for automation amid labor shortages as well as government-led digital transformation and emission control.
BOJ policymakers will analyze this and other pieces of data ahead of their next policy meeting on July 30-31, when the board will update their medium-term growth and inflation forecasts. It will also provide specific plans on how the bank should reduce purchases of Japanese government bonds as part of its process to normalize policy and revive market functions.
Some market participants expect the BOJ to raise the overnight rate again in July or September, and possibly one more time by year-end or early next year, but the outlook for a steady increase in service prices, the key to anchoring inflation around the bank’s 2% target, remains uncertain as regulated wages for medical, welfare workers and educators have been kept low.
At its latest meeting on June 13-14, the nine-member board decided in a unanimous vote to hold the overnight interest rate target steady in a range of 0% to 0.1% for the second straight meeting after conducting its first rate hike in 17 years and ending the seven-year-old yield curve control framework in March.
Other details from the BOJ Tankan conducted from May 29 until June 28.
Many firms are believed to have returned their responses by mid-June, when the yen’s protracted weakness had already raised concerns among households and businesses that import costs were set to rise further. In late June, the dollar rose to more than 37-year highs above ¥161.
Near-Term Outlook Among Most Sectors Narrowly Mixed
Looking three months ahead, major manufacturers forecast that their sentiment will rise slightly to 14 in September after improving to 13 in June while major non-manufacturers foresee their sentiment will slide further to 27 after slipping to 33.
Smaller manufacturers forecast to see their September sentiment index at zero, up slightly from -1 (minus 1) in June, while smaller non-manufacturers project their sentiment will fall to 8 from 12 as they tend to be cautious about their near-term outlook.
Some Firms See Higher Inflation Amid Elevated Costs But Outlook Stable
Some firms expect higher inflation, reflecting the highest wage growth in 33 years for workers at large firms in fiscal 2024 and a resumed increase in import costs, but overall inflation expectations are stable around the BOJ’s 2% target.
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 1.7% in five years (1.5%). Large non-manufacturers expect inflation at 2.0% in a year (2.0% previously), 1.8% in three years (1.8%) and 1.6% in five years (1.6%). Smaller firms expect a slightly higher rate of inflation in most timeframes.
Firms Expect Further Gains in Dollar, Euro Vs. Yen in Fiscal 2024
In the June Tankan survey, Japanese firms assumed the dollar/yen and euro/yen exchange rates would average well above their earlier forecasts. The BOJ is in the process of normalizing its policy, ending the negative short-term interest rate in March and deciding to reduce its Japanese government bond purchases in June, but the pace of its rate hikes is expected to remain only gradual, leaving monetary conditions accommodative in sharp contrast to the Federal Reserve’s restrictive interest rate levels.
Firms assumed the dollar/yen exchange rate would average at ¥144.77 for fiscal 2024 (compared to the current market rate around ¥160), up from ¥141.42 projected in March, while assuming the euro/yen forex rate would average at ¥155.40 (vs. around ¥173 at this point), also up from ¥151.86.