–Manufacturers Cautious Amid Dimmer Global Growth Outlook
–Services Upbeat as Govt Refrains from Imposing Strict Covid Rules
–Business Confidence Seen Mostly Lower in December Amid Uncertainty
–Firms, Large and Small, Further Revise Up Their Combined FY22 Capex Plans
By Max Sato
(MaceNews) – Confidence among major manufacturers in Japan unexpectedly slipped for the third straight quarter in September on dimmer global growth prospects amid tightening by many central banks, while sentiment among service providers picked up as the government avoided urging strict public health rules despite a surge in Covid cases, the Bank of Japan’s quarterly Tankan business survey for September released Monday showed.
Many firms are believed to have returned their responses by mid-September, when the drag from the seventh and worst wave of the pandemic in Japan had shown signs of receding.
The survey also showed smaller companies further revised up their plans for investment in equipment in fiscal 2022 that began on April 1, and plans by large corporations, which had been already revised up sharply in the June survey, were raised at a faster-than-expected pace from three months earlier.
The government refrained from imposing strict public health rules, allowing the economy to reopen further in the summer months despite a jump in Covid cases. Some capex plans appear to be carried over from fiscal 2021 that ended in March, when the economy was hit by the previous wintertime spike in Covid cases and supply delays were exacerbated by the Ukraine war. Capex is supported by potential demand for automation, government-led digital transformation and emission control.
The BOJ will analyze this and other pieces of data ahead of its next policy meeting on Oct. 27-28, at which the bank is expected to leave its easing stance unchanged to continue supporting the economy’s gradual recovery from the pandemic-caused slump and achieve stable 2% inflation that comes with substantial wage growth. Unlike in the U.S., Japan’s economy is not overheating and its output gap remains in negative territory.
The bank’s branch managers will report on regional economic conditions at a quarterly meeting in Tokyo on Oct. 6 ahead of the Oct. 28 release of the quarterly Outlook Report, in which the bank will provide updates on board members’ medium-term GDP and CPI forecasts.
The key points from the BOJ Tankan conducted from Aug. 29 until Sept. 30
* The Tankan diffusion index showing sentiment among major manufacturers stood at 8 in September, down slightly from 9 in June and below 14 in March and 18 in both December and September last year, when it rose from 14 the previous quarter. It was much weaker than the median forecast of 11 in a Mace News survey of 10 economists (forecasts ranged from 8 to 12),
* The Tankan index measuring sentiment among major non-manufacturers rose to 14 in September, up slightly from 13 in June and above 9 in both March and in December and 2 in September last year. It was firmer than the median forecast of 12 (range: 7 to 15).
* Looking three months ahead, major manufacturers expect their sentiment to be up slightly at 9 in December from 8 now (the median economist forecast was 11) while major non-manufacturers see their sentiment slipping back to 11 from 14 (the median forecast was 15).
* The sentiment index for smaller manufacturers stood at -4 (minus 4) in September, unchanged from -4 in both June and March and following -1 in December and -3 in September last year. It was softer than the median forecast of -3 (range: -5 to -1).
* The index for their non-manufacturing counterparts rose to 2 from -1 three months earlier and well above -6 in March, -4 in December and -10 in September 2021. It was better than the median economist forecast of -2, with forecasts ranging from -6 to 0.
* Smaller manufacturers expect their December sentiment index to slip to -5 from -4 in September (the median forecast was -4) while smaller non-manufacturers expect their sentiment to dip to -3 from 2 (the forecast was -3).
* 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.
Firms Revise Up FY22 Capex Plans
* Smaller businesses reported their capex plans for fiscal 2022 would rise by a combined 1.3% from the previous fiscal year, revised up from a 1.4% fall projected in the previous survey. It was slightly below than the median forecast of a 1.6% increase (range: a 1.3% drop to a 3.7% rise). Smaller firms tend to raise their plans later in the fiscal year. Their combined capital investment for fiscal 2021 is estimated to have increased 6.2%.
Uncertainty Remains Amid Rising Costs, Falling Real Wages
* The outlook remains uncertain, with the cost of living rising and real wages falling. The annual rate of increase in producer costs in Japan has eased from April’s 41-year high of 9.8% but is still high at 9.0% in August, leading to more markups in utilities, food and durable goods and pushing up consumer inflation to nearly 31-year highs of 2.8% in the core CPI and 3.0% overall, when the direct impact of the sales tax hikes in 2014 and 1997 is excluded.
* The Tankan input prices indexes (rise minus fall) indicated the costs for materials and products remain high but the upward pressure may be easing. The pace of increase in output prices indexes also moderated after firms have passed higher costs onto customers in the past several months. Some companies are cautious about raising prices sharply for fear of losing market share.
* The output prices index for large manufacturers rose by just 2 points to 36 in September after rising 10 points to 34 in June while their input prices index was unchanged at 65 after gaining 7 points to 65 in the previous survey. The output prices index for non-manufacturers rose by 4 points to 23 in September after rising 6 points to 19 in June, and their input prices index gained 6 points to 49 after rising 8 points to 43 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 Y125.71, much firmer than Y118.96 in June and Y111.93 in March. Companies assumed the euro/yen forex rate to average at Y134.15 in the September survey, also up from Y131.60 in June and 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 has said it expects to raise interest rates further to dampen demand fend off the risk of a persistent upward shift in inflation expectations.