BOJ Q4 Tankan: Major Manufacturers’ Sentiment Dips, Services Up; Most Sectors Cautious Ahead

–Manufacturers Cautious Amid Global Slowdown, Elevated Costs  

–Govt Travel Discount Scheme, Eased Covid Border Rules Support Services  

–Business Confidence Seen Dimmer in March as Uncertainties Linger

–Large Firms Revise Down FY22 Capex Plans but Still See Close to 20% Rise Over FY21

–Small Firms Continue Revising Up FY 22 Capex Plans but Lower Than Expected

By Max Sato

(MaceNews) – Confidence among major manufacturers in Japan drifted lower for the fourth straight quarter in December as credit tightening by major central banks and China’s zero-Covid policy have cooled off global demand while the Japanese government’s new travel discount program and eased Covid border control supported sentiment among service providers, the Bank of Japan’s quarterly Tankan business survey for December released Wednesday showed.

Looking ahead, most industries are cautious about their business climates, with non-manufacturers forecasting a slump in their sentiment for March.

Many firms are believed to have returned their responses by late November, when Japan had already entered the eighth wave of the pandemic (its peak is projected to be around mid-January), although it didn’t seem to hamper business and consumer mobility.

The survey also showed smaller companies further revised up their plans for investment in equipment in fiscal 2022 ending next March, and plans by large corporations, which had been already revised up sharply in June and September, were revised down slightly from three months earlier. 

The BOJ will analyze this and other pieces of data ahead of its next policy meeting on Dec. 19-20, at which the bank is expected to leave its easing stance unchanged in a unanimous vote to continue supporting the economy’s gradual recovery from the pandemic-caused slump and achieve stable 2% inflation that comes with substantial wage growth. Japan’s output gap remains in negative territory. 

The focus is on the Jan. 17-18 meeting, when the bank releases its quarterly Outlook Report to provide updates on board members’ medium-term GDP and CPI forecasts.

The key points from the BOJ Tankan conducted from Nov. 10 until Dec. 13

* The Tankan diffusion index showing sentiment among major manufacturers stood at 7 in December, down from 8 in September, 9 in June, 14 in March and 18 in both December and September last year, when it rose from 14 the previous quarter. It was just above the median forecast of 6 in a Mace News survey of 12 economists (forecasts ranged from 3 to 8).

* The Tankan index measuring sentiment among major non-manufacturers improved to 19 for December, up from 14 in September, 13 in June, 9 in both March and in December last year. It was firmer than the median forecast of 17 (ranging: from 13 to 20). Real household spending posted the fifth straight year-on-year rise in October and maintained a gain on the month as people continued to eat out, shop and travel despite signs that another wave of coronavirus infections was emerging.

* Looking three months ahead, major manufacturers expect their sentiment to edge down to 6 in March from 7 now (the median economist forecast was 5) while major non-manufacturers forecast their sentiment will slump to 11 from 19 for December (the median forecast was 16).

* The sentiment index for smaller manufacturers stood at -2 (minus 2) in December, down from -4 in the previous three quarter and -1 in December last year. It was firmer than the median forecast of -6 (range: from -8 to -4).,

* The index for their non-manufacturing counterparts rose to 6 from 2 in September, -1 in June, -6 in March and -4 in December 2021. It came in slightly firmer than the median forecast of 5 (range: from 2 to 7).

* Smaller manufacturers expect their March sentiment index to slip back to -5 from -2 in December (the median forecast was -7) while smaller non-manufacturers expect their sentiment to decline to -1 from 6 (the forecast was 4).

* 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 Slightly Cautious, Smaller Firms Revise Up FY22 Capex Plans

* Amid global uncertainty, major firms slightly revised down their plans for business investment in equipment to a combined 19.2 percent year-over-year increase in fiscal 2022 ending next March, from a 21.5 percent gain projected in September. The pace is still high, compared to an 18.6 percent rise planned in June and a modest 2.2% rise projected in March and an estimated 2.3 percent drop for fiscal 2021. It was below the median economist forecast for an 20.8% rise (forecasts by 11 economists ranged from 19.3% to 21.4% gains).

* Smaller businesses reported their capex plans for fiscal 2022 would rise by a combined 3.8% from the previous fiscal year, revised up from a 1.3% rise planned in September and a 1.4 percent fall forecast in June. It was slightly below the median forecast of a 4.2% increase (range: 3.0% to 5.8% gains). 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%. 

* Some capex plans appear to be carried over from fiscal 2021 that ended in March, when the economy was hit by the drag from the wintertime spike in Covid cases and global supply constraints were exacerbated by the Ukraine war. Capex is supported by potential demand for automation, government-led digital transformation and emission control. 

Costs, Sales Prices Remain High but Seen Easing Months Ahead 

* The outlook remains uncertain, with the cost of living rising and real wages falling. Producer inflation in Japan eased only slightly to 9.3% in November from an upwardly revised 9.4% gain in October and hitting a 41-year high of 10.3%. Consumer inflation in Japan soared in October as many more firms, hit by high producer and import costs amid the weak yen, jacked up retail prices for food, beverages, electronic appliances and tobacco, boosting the core CPI annual rate to a more than 40-year high of 3.6%.

* The Tankan input prices indexes (rise minus fall) showed the costs for materials and products remained high but the upward pressures will ease substantially, going forward. The output prices indexes continued rising but indicate a slowdown in March.

* The output prices index for large manufacturers rose by 5 points to 41 in December after rising 2 points to 36 in September and surging 10 points to 34 in June. The index for March is seen falling to 34. Their input prices index edged up a point to 66 after being unchanged at 65 in September and gaining 7 points to 65 in June. It is expected to dip by 10 points to 56 in March.

* The output prices index for large non-manufacturers rose by 5 points to 28 in December after rising 4 points to 23 in September and rising 6 points to 19 in June. The March index is seen unchanged at 28. Their input prices index gained 4 points to 53 after increasing 6 points to 49 in September and climbing 8 points to 43 in June. The index is seen at 49, down by 4 points from now.

* On general prices, major manufacturers on average forecast an annual inflation rate of 2.3% a year from now (vs. 2.2% in the previous survey), 1.7% in three years (vs. 1.6%) and 1.6% in five years (vs. 1.4%). Large non-manufacturers expect inflation at 2.0% in a year (vs. 1.8% in September), 1.5% in three years (vs. 1.4%) and 1.4% in five years (vs. 1.3%).

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 Y130.75, closer to the current rate of around Y136 and much higher than Y125.71 in September, Y118.96 in June and Y111.93 in March. Companies assumed the euro/yen forex rate to average at Y136.51 in the December survey (vs. the current rate of around Y144), also up from Y134.15 in September, Y131.60 in June and Y128.18 in March.