–Lumber Producers, Auto Industry, Food and Beverage Firms Expect Pullback in December
–Hotels, Restaurants Cautious About Near-Term Outlook After Recent Gains
–Large Firms Revise Up Their Combined Capex Plans Slightly for Fiscal 2023; Small Firms Push Theirs Sharply Higher
By Max Sato
(MaceNews) – Confidence among major manufacturers in Japan picked up at a faster-than-expected pace in September after posting its first rise in seven quarters in June as improved supply chains supported the auto industry, the heat wave boosted food and beverage makers and the recent jump in energy prices propped up refiners, offsetting sluggish demand for production machinery amid slower global growth, the Bank of Japan’s quarterly Tankan business survey released Monday showed.
Relaxed Covid restrictions are supporting restaurants, hotels, retail stores and some other service providers while confidence among electricity and natural gas utilities jumped on rising profits through markups.
Japan’s Covid border control was widely eased in May and the yen remains weak, leading to a fast recovery in spending by foreign visitors at retail stores and tourist destinations. But government officials have warned that elevated costs for daily necessities are making Japanese households more cautious about spending.
Looking ahead, large manufacturers foresee a slight improvement in sentiment three months ahead and small manufacturers are seen playing catchup while non-manufacturers, particularly wholesalers and retailers as well as hotel and restaurant operators, expect a pullback in December after the latest improvement as they predict labor shortages will become worse.
Many firms are believed to have returned their responses by mid-September. By then, revised second quarter GDP data had been released, showing that Japan’s strong economic growth led by a sharp rebound in net exports amid easing import costs in the April-June quarter was revised down as business investment in equipment, private consumption and public works spending all turned out to be weaker than initially estimated.
The Tankan survey also showed large corporations revised up their plans for investment in equipment slightly for fiscal 2023 that began in April, as largely expected, and smaller firms raised their capex plans much more sharply than forecast. Capex is generally supported by demand for automation amid labor shortages 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 Oct. 30-31, when the bank is expected to leave its basic easing stance unchanged to help achieve stable 2% inflation with substantial wage growth while continuing to review the costs and benefits of keeping the yield curve control framework including the negative short-term interest rate target.
Japan’s output gap has turned slightly positive after staying in negative territory for three and a half years. It is estimated at plus 0.1 percentage point in the April-June quarter, improving from minus 0.9 point in the previous quarter and minus 9.1 points in April-June 2020, the worst point during the period, according to the Cabinet Office.
The key points from the BOJ Tankan conducted from Aug. 29 until Sept. 29.
* The Tankan diffusion index showing sentiment among major manufacturers jumped to 9 in September from 5 in June and 1 in March, when it dipped from 7 in December, 8 in September, 9 in June, 14 in March 2022 and 18 in both December and September 2021, when it rose from 14 the previous quarter. It was well above the median forecast of 6 in a survey of 10 economists (forecasts ranged from 4 to 8).
* The increase was led by lumber and wood product makers, refineries, makers of ceramic, stone and clay, food and beverage producers and the auto industry. Confidence declined among makers of production and general machinery, producers of non-ferrous metals and processed metals.
* The Tankan index measuring sentiment among major non-manufacturers rose to 27 in September from 23 in June for the sixth straight quarter of improvement, following 20 in March, 19 in December, 14 in September, 13 in June, 9 in both March 2022 and in December 2021. It was also above the median forecast of 24 (ranging from 21 to 24).
* The improvement was led by electric and gas utilities, the hotels and restaurants category, service providers for businesses, retailers and wholesalers, and real-estate firms. On the downside, service providers for individuals reported a setback after rising previously and leasing companies continued to see a slide in confidence.
* Looking three months ahead, major manufacturers expect their sentiment to rise further to 10 (above the median forecast of 6) in December from 9 in September while major non-manufacturers forecast their sentiment will slip to 21 (the median forecast was 24) after the latest improvement to 27 from 23.
* Lumber and wood product makers foresee a sharp decline in the December quarter and both automakers and food and beverage producers expect a downward adjustment after the recent improvement. Among non-manufacturers, wholesalers expect a sharp drop and retailers see a pullback in December. Hotels and restaurants remain cautious about their outlook, forecasting a slight drop in sentiment. Electricity and gas utilities also anticipate a slight drop after the jump in September.
* The sentiment index for smaller manufacturers stood at -5 (minus 5) in September, unchanged from June. It was slightly better than -6 (minus 6) seen in March, when it fell from -2 in December and following -4 (minus 4) in the previous three quarters. The latest figure was just below the median forecast of -4 (range: from -7 to -2).
* The index for their non-manufacturing counterparts posted the sixth consecutive improvement in September, rising to 12 from 11 in June, as expected (forecasts ranged from 9 to 14). It has gradually risen from 8 in March, 6 in December, 2 in September, -1 (minus 1) in June and -6 (minus 6) in March 2022.
* Smaller manufacturers expect their December sentiment index to be at -2 (minus 2), up from -5 (minus 5) in September (the median economist forecast was -5) while smaller non-manufacturers expect their sentiment to slide to 8 from 12 in September (the median forecast was 11).
* 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.
Companies Revise Up Capex Plans for Fiscal 2023, Sharp Rise Among Smaller Firms
* Major firms projected their plans for business investment in equipment to rise a combined 13.6% on the year in fiscal 2023 ending in March 2024, revised up slightly from the 13.4% increase planned in the June survey and up sharply from a modest 3.2% planned in March. The median forecast by nine economists was a 13.8% increase, ranging from 12.4% to 14.7% gains.
* Smaller firms revised up their combined capital spending to a sharply higher 8.0% rise in fiscal 2023 from the 2.4% increase planned three months earlier and an unusually bullish 1.4% rise projected in March. It was well above than the consensus call of a 4.4% increase (ranging from a 2.3% drop to a 5.9% rise). Small businesses tend to forecast a decline at the start of the new fiscal year and revise up their plans later in the year.
Firms See Inflation Below BOJ’s 2% Target in Longer Term
* Manufacturers, big and small, see a slightly slower increase in general prices for the coming 12 months, compared to their expectations in the previous survey, while non-manufactures expect no change. Large manufacturers predict a slight pickup in inflation in three to five years ahead, but other sectors see no to little change. Overall, firms continue to expect inflation to fall slightly below the BOJ’s 2% inflation target in the longer run.
* Major manufacturers on average forecast an annual inflation rate of 2.1% a year from now (2.2% in the previous survey), 1.8% in three years (1.7%) and 1.7% in five years (1.6%). Large non-manufacturers expect inflation at 2.0% in a year (2.0% previously), 1.6% in three years (1.6%) and 1.5% in five years (1.4%).
* Producer inflation in Japan eased for the eighth straight month to 3.2% in August from 3.4% in July, staying at an over two-year low, as the government’s utility subsidies continued to cut electricity and natural gas costs and some commodity prices remained depressed or posted slower gains compared to last year’s spike, BOJ data released last month showed.
Firms Continue to Expect Higher Dollar, Euro Vs. Yen in Fiscal 2023
* In the September quarter Tankan survey, Japanese firms assumed the dollar/yen exchange rate to average at ¥135.75 for fiscal 2023, up further from ¥132.43 provided in June, while assuming the euro/yen forex rate to average at ¥144.62, also up further from ¥140.11 seen three months ago.
* The interest rate differential between the U.S. and Japan remains wide as investors look for higher returns. The Federal Reserve has paused in its current tightening cycle but it is expected to raise interest rates again this year while the Bank of Japan is unlikely to switch to tightening from easing soon, although its board has been debating the costs and benefits of the yield curve control framework.