BOJ June Tankan Business Sentiment Mixed; Manufacturers Down, Services Up

–Covid Lockdowns in China, High Producer Costs Weigh on Factory Operators

–Services Upbeat on Japan’s Eased Covid Rules, Summer Spending Hopes

–Business Confidence Seen Flat to Softer in September Amid Uncertainty

–Firms, Large and Small, Revise Up Their Combined FY22 Capex Plans

By Max Sato

(MaceNews) Confidence among major manufacturers in Japan sagged for a second straight quarter in June amid Covid lockdowns in Chinese cities while sentiment among service providers improved after the government eased public health restrictions in late March, the Bank of Japan’s quarterly Tankan business survey for June released Friday showed.

Many firms are believed to have returned their responses by mid-June, before the two-month Covid lockdown in Shanghai, the trading hub, was lifted at the end of the month.

The survey also showed both large and smaller companies revised up their plans for investment in equipment sharply for fiscal 2022 that began on April 1. The drag from the pandemic is fading and some plans may be carried over from the previous quarter, when the economy was hit by a spike in Covid cases and supply delays were exacerbated by the Ukraine war. Capex is supported by potential demand for automation, government-led digitization and emission control. 

The BOJ will analyze this and other pieces of data ahead of its next policy meeting on July 20-21, at which the bank is expected to leave its easing stance unchanged as the bank sees the recent spike in inflation from around 1% to just above 2% as only temporary. Unlike in the US, rising consumer prices are not backed by excess demand and Japan’s output gap remains in negative territory. 

The bank’s branch managers will report on regional economic conditions at a quarterly meeting in Tokyo on July 11 ahead of the July 21 release of the quarterly Outlook Report, in which the bank provide updates on board members’ medium-term GDP and CPI forecasts.

The Tankan showed companies are generally cautious about their outlook. People are expected to dine out, travel and go to events more freely in the summer without strict Covid rules while gradually easing border restrictions are raising hopes that foreign tourists will eventually return to Japan. Supply bottlenecks may ease but producer costs remain high.

The heat wave that has brought in record high temperatures for June in some areas could boost demand for summer clothing and beverages but dangerously hot and humid weather could also discourage people from going out. Power companies have been calling on households and businesses to cut electricity use to help avoid a blackout.  

The key points from the BOJ Tankan conducted from May 30 until June 30.

* The Tankan diffusion index showing sentiment among major manufacturers stood at 9 in June, down from 14 in March and 17 in December, when it was unchanged from September. It was much weaker than the median forecast of 12 in a Mace News survey of 10 economists (forecasts ranged from 10 to 14).

* The Tankan index measuring sentiment among major non-manufacturers rose to 13 from 9 in March, 10 in December and 2 in September. It was in line with the median forecast of 13 (range: 12 to 19).

* Looking three months ahead, major manufacturers expect their sentiment to rebound slightly to 10 in September (the median economist forecast was 14) while major non-manufacturers see their sentiment being unchanged at 13 (the median forecast was 16). 

* The sentiment index for smaller manufacturers stood at -4 (minus 4) for June, unchanged from -4 in March but worse than -1 in December and -3 in September. It was better than the median economist forecast of -7, with forecasts ranging from -10 to -1.

* The index for their non-manufacturing counterparts rose to -1 from -6 three months earlier and -3 in December. It was firmer than the consensus forecast of -3 (range: -4 to +5)

* Smaller manufactures expect their September sentiment index to slip to -5 (the median forecast was -7) while smaller non-manufactures expect their sentiment to decline to -5 (the forecast was -2).

* 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.

FY22 Capex Plans Revised Up More Sharply Than Expected  

* The Tankan also showed major firms, backed by profit gains on export global reopening demand, plan to increase their business investment in equipment by a combined 18.6% in fiscal 2022 ending next March, revised up sharply from a 2.2% rise planned in March. It was much stronger than the median economist forecast for an 8.4% rise (forecasts by nine economists ranged from +5.4% to +11.3%).

* Smaller businesses said their capex plans for fiscal 2022 would fall by a combined 1.4% from the previous fiscal year, also revised up sharply from a 11.4% drop projected in the previous survey. It was stronger than the median forecast of a 7.0% drop (range: -11.4% to -4.8%). Smaller firms are expected to raise their plans later in the fiscal year, as they tend to do.

Company Raising Sales Prices as Producer Costs Surge

* The Tankan input prices index (rise minus fall) continued to rise, reflecting surging material and product costs, while the output prices index also showed increases from March as more firms are trying to pass higher costs onto customers.

* The output prices index for large manufacturers rose by 10 points to 34 in June after rising 8 points to 24 in March while their input prices index climbed by 7 points to 65 after rising 9 points to 58 in the previous survey. The output prices index for non-manufacturers rose by 6 points to 19 in June after rising 3 points to 13 in March, and their input prices index gained 8 points to 43 after jumping 10 points to 35 previously.

Firms Continue to See Higher Dollar, Euro Vs. Yen

* The average dollar/yen exchange rate assumed by all firms in all industries for

fiscal 2022 was Y118.96, firmer than Y111.93 in March. Companies assumed the euro/yen forex rate to average at Y131.60 in the June survey, also up from Y128.18 in March. The results reflect the BOJ’s stance to maintain monetary easing while the Federal Reserve is tightening aggressively to fight inflation and the European Central Bank appears to set to raise interest rates gradually. 

BOJ Governor Haruhiko Kuroda has said in his recent parliamentary testimony and press remarks that “a rapid depreciation of the yen has a negative impact on Japan’s economy as it heightens uncertainties about the future and therefore makes it difficult for firms to formulate their business plans.”

As the dollar topped Y136, hitting the highest level in about 24 years, Kuroda has stopped saying the net effect of the weak yen on the overall Japanese economy is “positive,” which was his assessment in late April when the yen was at around Y130 to the dollar and its decline was more gradual than in recent trading.

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