BOJ March Quarter Tankan: Manufacturers’ Sentiment Dips on Global Slowdown, Services Propped Up by Travel, Eating Out

–Carmakers, Paper/Pulp Makers See Rebound in June Sentiment; Steel Mills, Machine Makers Expect Decline

–Wholesalers, Construction Firms See Lower June Sentiment; Hotels, Restaurants, Telecommunications Upbeat

–Large Firms’ Capex Plans Show Solid Start to Fiscal 2023, Small Firms Unusually Bullish in Initial Plans

By Max Sato

(MaceNews) – Confidence among major manufacturers in Japan drifted lower for the fifth straight quarter in March amid global slowdown and elevated costs while the Japanese government’s travel discount program and eased Covid border control continued to support sentiment among service providers, the Bank of Japan’s quarterly Tankan business survey for March released Monday showed.

Looking ahead, some manufacturers are optimistic about their business climates while many non-manufacturers project a slip in their sentiment for June.

Many firms are believed to have returned their responses by mid-March, when consumers were traveling and eating out more freely, having seen the impact of the eighth wave of the pandemic wane from its peak in January. The government lifted its long-held face-covering public health mandate in March but many people continue wearing a mask at workplaces and in other closed spaces. 

The survey also showed large firms had solid plans for investment in equipment for fiscal 2023 starting on April 1 while smaller firms projected a rise at the initial stage, which is unusually bullish. Some plans may be carried over from fiscal 2022.  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 April 27-28, at which the bank is expected to leave its easing stance unchanged in a unanimous vote to continue supporting the economy’s recovery from the pandemic-caused slump and achieve stable 2% inflation that comes with substantial wage growth. Japan’s output gap has been in negative territory since the last quarter of 2019, by 2.0 percentage points in the latest estimate by the Cabinet Office.   

The key points from the BOJ Tankan conducted from February 27 until March 31

* The Tankan diffusion index showing sentiment among major manufacturers stood at 1 in March, down from 7 in December, 8 in September, 9 in June, 14 in March 20022 and 18 in both December and September 2021, when it rose from 14 the previous quarter. It was below the median forecast of 3 in a Mace News survey of 11 economists (forecasts ranged from -2 to 5). The decrease was led by general and electric machine makers amid slowing global demand as well as lumber/wood producers and oil refineries following a pullback in commodities markets after last year’s spike.

* The Tankan index measuring sentiment among major non-manufacturers improved slightly to 20 from 19 for 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 20 (ranging from 18 to 22). The improvement was led by retailers and service providers for individuals.

* Looking three months ahead, major manufacturers expect their sentiment to edge up to 3 in June after worsening to 1 in March (the median economist forecast was 4) while major non-manufacturers forecast their sentiment will slip to 15 from 20 (the median forecast was 18).

* The auto industry expects a further improvement in June and paper/pulp makers see a rebound while steel mills forecast a further drop and general machine makers see a setback. Wholesalers and construction firms expect their sentiment to drop, but hotels/restaurants and telecommunications firms are relatively upbeat.

* The sentiment index for smaller manufacturers stood at -6 (minus 6) in March, down from -2 in December, -4 in the previous three quarters and -1 in December 2021. It was in line with the median forecast of -6 (range: from -11 to -4).

* The index for their non-manufacturing counterparts stood at 8 in March, up from 6 in December, 2 in September, -1 in June, -6 in March 2022 and -4 in December 2021. It came in firmer than the median forecast of 6 (range: from 2 to 9).

* Smaller manufacturers expect their June sentiment index to be at -4 (minus 4) in June, up slightly from -6 March (the median forecast was -6) while smaller non-manufacturers expect their sentiment to decline to 3 after improving to 8 in March (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.

Large Firms See Solid Capex Plans for Fiscal 2023

* Major firms projected their plans for business investment in equipment to rise a combined 3.2% on the year in fiscal 2023 ending in March 2024, a solid start given slowing global demand and concerns about banking failures in the U.S. and Europe. The Mace News median forecast by nine economists was a 3.2% increase, ranging from 0.5% to 4.9% gains.

* Smaller firms expect their combined capital spending to rise 1.4% in fiscal 2023, an unusually bullish figure, 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. The median forecast was a 10.7% decrease, ranging from 17.0% to 9.0% declines.

* As for fiscal 2022, large firms revised down their plans for business investment to a combined 16.4% increase from their plans of a 19.2% rise presented in December. The pace is still high, compared to a 2.3 percent drop in fiscal 2021. It was above the median economist forecast for a 14.0% rise (forecasts by 10 economists ranged from 11.1% to 18.0% gains).

* Smaller businesses reported their capex plans for fiscal 2022 would rise by a combined 0.7% from the previous fiscal year, unexpectedly revised down from a 3.8% rise planned in March. It was well below the median forecast of a 5.0% increase by nine economists (range: 0.2% to 5.9% gains). Their combined capital investment for fiscal 2021 increased 6.2%. 

Firms See Inflation to Drift Lower in Medium to Longer Term

* Companies see a slight uptick in general prices for the next few years, compared to their expectations in the previous survey, but they expect prices to stabilize below the BOJ’s 2% inflation target in the longer term. Major manufacturers on average forecast an annual inflation rate of 2.4% a year from now (vs. 2.3% in the previous survey), 1.8% in three years (vs. 1.7%) and 1.6% in five years (vs. 1.6%). Large non-manufacturers expect inflation at 2.2% in a year (vs. 2.0% in December), 1.6% in three years (vs. 1.5%) and 1.4% in five years (vs. 1.4%).

* Companies are faced with elevated costs and labor shortages as well as slower demand from overseas. Consumers are also trimming some spending amid rising costs for food, beverages and some durable goods as many firms are still trying to pass high producer and import costs onto customers.

* Producer inflation in Japan remains high but eased to 8.2% in February from 9.5% in January as the government is trying to cap sharp increases in energy costs while fuel and lumber prices fell at a faster pace amid slowing global demand. Consumer inflation in Japan slowed significantly to just above 3% in February in two key measures after hitting four-decade highs of over 4% in January as the government expanded subsidies to electricity and natural gas suppliers aimed at easing the pain of households hit by falling real wages.

Firms Expect Higher Dollar, Euro Vs. Yen in Fiscal 2023

* In the March Tankan survey, Japanese firms assumed the dollar/yen exchange rate to average at Y131.72 in fiscal 2023 in their first estimate while assuming the euro/yen forex rate to average at Y138.29.

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

fiscal 2022 was Y130.65 (vs. the current market rate of around Y133), lower than Y130.75 assumed in December, Y125.71 in September, Y118.96 in June and Y111.93 in March 2022. Companies assumed the euro/yen forex rate to average at Y137.38 in the March survey (vs. the current rate of around Y144), which was up from Y136.51 in December, Y134.15 in September, Y131.60 in June and Y128.18 in March last year.