BOJ March Quarter Tankan: Major Manufacturers’ Sentiment Posts First Setback in 4 Quarters After Recent Gains as Suspended Vehicle Output Causes Widespread Downturn

–Major Non-Manufacturers’ Confidence Up for 8th Straight Quarter, at Fresh 32-Year High
–Many Sectors Expect Pullback in June Sentiment
–Large Firms Project Solid Capex Plans in Fiscal 2024 While Revising Down Plans for Fiscal 2023; Smaller Firms See Cautious Start

By Max Sato

(MaceNews) – The Bank of Japan’s quarterly Tankan business survey released Monday showed confidence among manufacturers fell slightly in March as suspended vehicle output over a safety test scandal triggered a widespread slump in overall production while sentiment among some non-manufacturers continued improving but the effects of domestic pent-up demand for traveling and eating out and strong post-Covid inbound spending appeared to have lost some steam.

The Tankan diffusion index showing sentiment among major manufacturers posted its first drop in four quarters, slipping to 11 from 13 (revised from 12) in December, when it rose more than expected from 9 in September. It was just above the median forecast of 10 (forecasts ranged from 6 to 11). December’s reading of 13 remains the highest since 14 in March 2022 but below the recent peak of 18 seen in both December and September 2021.

The index measuring sentiment among major non-manufacturers stood at a fresh 32-year high of 34, recording the best reading since 41 in September 1991 and marking the eighth straight quarterly increase after rising to 32 (revised from 30) in December from 27 in September. It was also slightly above the median forecast of 33 (ranging from 30 to 34).

The BOJ has shuffled sample corporations in the Tankan survey, resulting in revisions to prior figures. Sample firms are revised once every two to three years to reflect changes made to the government database.

Major firms projected their plans for business investment in equipment would rise a combined 11.5% on the year in fiscal 2023 ending in March 2024, revised down from the 13.2% increase (revised from 13.5%) planned in the December survey. It was slightly higher than the median forecast of a 10.4% increase (forecasts ranged from 9.5% to 12.8% gains). Their plans for fiscal 2024 are a 4.0% increase over the previous year, higher than the median forecast of a 3.0% rise. A year ago, large firms projected a 3.2 percent increase for fiscal 2023, a solid start given slowing global demand and concerns about banking failures in the US and Europe at the time.

Smaller firms basically maintained their combined capital spending plans at an 8.4% increase in fiscal 2023, instead of revising them down (consensus was a 7.8% rise) after raising their plans to an 8.3% rise (revised down from a 10.3% gain) in December. For fiscal 2024, smaller firms projected a 3.6% drop, compared to the median forecast of a 1.0% fall and an unusually bullish 1.4 percent rise planned in March 2023. Small businesses tend to forecast a decline at the start of the new fiscal year and revise up their plans later in the year.

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 April 25-26, when they are expected to leave its stance unchanged. At its previous meeting in March, the board decided in a majority vote to end the seven-year-old yield curve control framework and conducting the bank’s first rate hike in 17 years by lifting the negative short-term interest rate target. BOJ officials have stressed that the policy change should not be seen as tightening and that financial conditions will remain accommodative for now.

Other details from the BOJ Tankan conducted from Feb. 27 until March 29.

* Many firms are believed to have returned their responses by mid-March. It was before the March 18-19 BOJ policy meeting but financial markets had priced in a shift toward normalizing the bank’s policy framework with a slight rate hike based on reports that major firms had agreed to raise wages at a faster pace in fiscal 2024. On the downside, data released in late February showed that industrial production plunged in January, hit by suspended vehicle output, and consumer spending was sluggish amid high living costs. 

* 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 slightly to 10 (below the median forecast of 12) in June from 11 in March while major non-manufacturers forecast their sentiment will slide to 27 (weaker than the median forecast of 30) after the latest improvement to 34.

* In its monthly report for March, Japan’s government maintained its overall assessment, saying the economy is recovering moderately despite some softs and in light of clearer signs that many firms are raising wages at a faster pace. But it also repeated its warning against downside risks from Chinese slowdown, the Middle East conflict, inflation and the effects of the powerful New Year’s Day earthquake in the northwestern region of Hokuriku that has reduced electronic parts supply and battered tourism.

* Large automakers expect a continued decline in June sentiment after a slump in March. Lumber and wood product makers foresee a plunge into negative territory after seeing a flat reading. Food and beverage producers expect a pullback three months ahead after a continued rise through the March quarter. Steel mills also anticipate a sharp drop after reporting a slide in the latest sentiment.

* Among large non-manufacturers, hotels and restaurants expect a pullback in June after seeing their sentiment flat in March and improving previously. Retailers see a slight drop after being flat while wholesalers expect a larger decline. Telecommunications firms anticipate a modest pickup after a slump in Mrach. Transportation and postal services foresee a continued improvement despite driver shortages that are expected to get worse this year as the government has tightened regulations on working hours.

* The sentiment index for smaller manufacturers stood at -1 (minus 1) in March, down from 2 (revised from 1) in December. It was slightly better than the median forecast of -2 (minus 2). December’s plus 2 was the first positive reading since plus 6 in the March quarter of 2019.

* The index for their non-manufacturing counterparts posted its first dip in eight quarters in March, easing to 13 from 14 in December and coming in weaker than the median forecast of 15. December’s 14 is the best reading since 21 in September 1991.

* Smaller manufacturers expect their June sentiment index to be at zero, up slightly from -1 (minus 1) in March (the median economist forecast was minus 2) while smaller non-manufacturers expect their sentiment to fall to 8 from 13 in March (consensus was 10).

Large Firms See Inflation Below BOJ’s 2% Target in Longer Term

* Both manufacturers and non-manufacturers see little change in general prices for the coming 12 months, compared to their expectations in the previous survey. Most sectors predict no change in inflation three years ahead (except for large non-manufacturers) while forecasts were mixed for the five-year period. Large firms continue to expect inflation to fall below the BOJ’s 2% inflation target in the longer run while smaller firms project inflation will remain above 2% both in the near- and longer-terms.

* 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 1.5% in five years (1.7%). Large non-manufacturers expect inflation at 2.0% in a year (2.0% previously), 1.8% in three years (1.6%) and 1.6% in five years (1.4%).

Firms Continue to Expect Higher Dollar, Euro Vs. Yen in Fiscal 2024

* In the March quarter Tankan survey, Japanese firms assumed the dollar/yen exchange rate to average at ¥141.42 for fiscal 2024 in their first estimate (vs. the current market rate of around ¥151) while assuming the euro/yen forex rate to average at ¥151.86 (vs. the current rate of around ¥163).

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

fiscal 2023 just ended would be ¥140.36, slightly higher than ¥139.38 assumed in December. Companies assumed the euro/yen forex rate to average at ¥150.24 in the March survey, which was also up from ¥148.85 seen previously.

* The interest rate differential between the U.S. and Japan remains wide after the BOJ’s small step toward normalizing its policy in March and expectations that the Federal Reserve will be cautious about cutting rates. Investors continue seeking higher returns, weighing on the yen.