–Carmakers Expect Brighter Outlook in September; Food Producers See Pullback After Large Gain in June
–Hotels, Restaurants See Slightly Lower September Sentiment After Jump in June; Real-Estate firms, Wholesalers Forecast Sizeable Declines
–Both Large and Small Firms Revise Up Their Combined Capex Plans for Fiscal 2023
By Max Sato
(MaceNews) – Confidence among major manufacturers in Japan picked up more than expected in June, posting the first rise in seven quarters, led by the auto industry amid improved supply chains, while the government’s travel discount program and eased Covid border control continued lifting sentiment among service providers, particularly hotels and restaurants, the Bank of Japan’s quarterly Tankan business survey for June released Monday showed.
Looking ahead, manufacturers are optimistic about their near-term business conditions but non-manufacturers project a slip in their sentiment for September.
During the survey period, the retail and tourism industries saw their business propped up by pent-up demand for traveling and dining out. The Japanese government ended most of its coronavirus border controls on April 29 at the start of the Golden Week holidays, boosting spending by foreign visitors. It also downgraded Covid-19 on May 8, allowing more people to travel and attend events freely without worrying about infections.
The survey also showed both large and small firms revised up their combined plans for investment in equipment for fiscal 2023 that began on April 1, with major firms upgrading their plans more than expected and smaller firms less than forecast. 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 July 27-28, at which the bank is expected to leave its basic easing stance unchanged to achieve stable 2% inflation with substantial wage growth while debating the costs and benefits of keeping the yield curve control framework including the negative short-term interest rate target.
Japan’s output gap has been in negative territory since the last quarter of 2019 but it has narrowed to minus 0.7 percentage point in the January-March quarter of 2023 from minus 1.2 points in October-December and minus 9.0 points in April-June 2020, the worst figure during the period, according to the latest estimate by the Cabinet Office.
The key points from the BOJ Tankan conducted from May 29 until June 30
* The Tankan diffusion index showing sentiment among major manufacturers marked its first increase in seven quarters in June, rising to 5 from 1 in March, when it dipped from 7 in December, 8 in September, 9 in June, 14 in March 2022 and 18 in both December and September 2021, when it rose from 14 the previous quarter.
* It was above the median forecast of 3 in a survey of 10 economists (forecasts ranged from 1 to 7). The increase was led by the auto industry thanks to improved supply chains, food producers as they continue to pass higher costs onto customers, and oil refineries after reporting higher revenues in fiscal 2022 on last year’s spike in energy prices.
* The Tankan index measuring sentiment among major non-manufacturers rose slightly to 23 for the fifth straight quarter of improvement after edging up to 20 in March from 19 in December and following 14 in September, 13 in June, 9 in both March 2022 and in December 2021.
* It was in line with the median forecast of 23 (ranging from 21 to 24). The improvement was led by the hotels and restaurants category, service providers for individuals and information services firms. Retailers and leasing companies reported a slight setback after showing solid improvement in the previous survey.
* Looking three months ahead, major manufacturers expect their sentiment to rise further to 9 (above the median forecast of 5) in September from 5 in June while major non-manufacturers forecast their sentiment will slip back to 20 (the median forecast was 21) after rising to 23.
* The auto industry expects a further improvement in the September quarter and processed metal producers see a rebound after reporting a slump in June while food producers and shipyards forecast a pullback following solid gains. Among non-manufacturers, hotels and restaurants expect their sentiment to edge down in September and real-estate firms and wholesalers forecast sizeable declines, but electricity and gas utilities firms anticipate a jump in sentiment as they are raising retail prices and service providers for individuals expect a further rise.
* The sentiment index for smaller manufacturers stood at -5 (minus 5) in June, up slightly from -6 (minus 6) in March, when it fell from -2 (minus 2) in December and following -4 (minus 4) in the previous three quarters. It was just below the median forecast of -4 (range: from -7 to -2).
* Smaller manufacturers expect their September sentiment index to be at -1 (minus 1), up slightly from -5 (minus 5) in June (the median forecast was -3) while smaller non-manufacturers expect their sentiment to decline to 7 after improving to 11 in June (the forecast was 8).
* 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.
Large Firms Revise Up Capex Plans for Fiscal 2023 More Than Expected
* Major firms projected their plans for business investment in equipment to rise a combined 13.4% on the year in fiscal 2023 ending in March 2024, revised up sharply from the 3.2% increase planned in the March survey. The median forecast by nine economists was a 9.6% increase, ranging from 4.0% to 11.9% gains.
* Smaller firms revised up their combined capital spending to a 2.4% rise in fiscal 2023 from the 1.4% rise planned three months earlier. It was lower than the consensus call of a 4.0% increase (ranging from a 0.8% drop to a 7.3% rise). Their initial plans reported in March were unusually bullish, given that they tend to forecast a decline at the start of the new fiscal year and revise up their plans later in the year.
Firms See Inflation to Drift Lower in Medium Term
* Companies see a slightly slower increase in general prices for the next few years, compared to their expectations in the previous survey. They continue to expect inflation to fall below the BOJ’s 2% inflation target in the longer term.
* Major manufacturers on average forecast an annual inflation rate of 2.2% a year from now (vs. 2.4% in the previous survey), 1.7% in three years (vs. 1.8%) and 1.6% in five years (vs. 1.6%). Large non-manufacturers expect inflation at 2.0% in a year (vs. 2.2% previously), 1.6% in three years (vs. 1.6%) and 1.4% in five years (vs. 1.4%).
* Producer inflation in Japan eased for the fifth straight month to a two-year low of 5.1% in May from 5.9% in April as the government’s utilities subsidies continued to cap energy costs and many commodities markets are softer on slowing global growth, particularly compared to last year’s spike, BOJ data released last month showed.
Firms Expect Higher Dollar, Euro Vs. Yen in Fiscal 2023
* In the June quarter Tankan survey, Japanese firms assumed the dollar/yen exchange rate to average at ¥132.43 for fiscal 2023, up from ¥131.72 provided in March, while assuming the euro/yen forex rate to average at ¥140.11, also up from ¥138.29 seen three months ago.
* The yen has depreciated again recently as the interest rate differential between the U.S. and Japan remains wide. The Federal Reserve paused in its current tightening cycle in June but it is expected to raise rates again this year while the Bank of Japan is unlikely to switch to tightening from easing soon. At its latest meeting on June 15-16, the BOJ policy board decided unanimously to maintain its monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve and large asset purchases to continue seeking stable 2% inflation and support sustainable wage growth.
—
Contact this reporter: max@macenews.com
Content may appear first or exclusively on the Mace News premium product. For real-time delivery in entirety contact tony@macenews.com. Twitter headlines @macenewsmacro