–Major Non-Manufacturers’ Confidence Seen Down Slightly After 8th Straight Quarterly Gain as Post-Covid Travel, Spending Wanes
–Many Sectors Expected to be Cautious Ahead amid Widespread Labor Shortages, Elevated Costs
–Large Firms Likely to Rev Up Capex Plans in Fiscal 2024; Smaller Firms Also Seen Revising Up Plans
By Max Sato
(MaceNews) – The Bank of Japan’s quarterly Tankan business survey is expected to show confidence among manufacturers improved only slightly or was flat in the June quarter, as the positive effects of resumed vehicle output in March after two months of suspension over safety issues may be offset by concerns over high costs, while sentiment among non-manufacturers is expected to edge down after recent improvement as post-Covid spending and traveling has waned.
The BOJ will release the results of its Tankan business survey conducted from late May through late June at 0850 JST on Monday, July 1 (1950 EDT/2350 GMT Sunday, June 30).
The Tankan diffusion index showing sentiment among major manufacturers is forecast at 12, up slightly from 11 in March, when it posted its first drop in four quarters, sliding back from 13 in December, which was 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 is seen at 33, down slightly from a fresh 32-year high of 34 recorded in March, which was the best reading since 41 in September 1991 and the eighth straight quarterly increase.
The sentiment index for smaller manufacturers is forecast at -1 (minus 1) in June, unchanged from March, when it fell to -1 (minus 1) from 2 in December, which was the first positive reading since 6 in the March quarter of 2019. The index for their non-manufacturing counterparts is expected to slip further to 12 after posting its first dip in eight quarters in March, easing to 13 from 14 in December. December’s 14 is the best reading since 21 in September 1991.
Major firms are expected to project their plans for business investment in equipment would rise a combined 14.2% on the year in fiscal 2024 ending on March 31, 2025, up sharply from a 4.0% increase planned in March amid widespread labor shortages and the need to digitize their operations.
Smaller firms are also expected to raise their combined capital spending plans to a 0.6% increase in fiscal 2024 after projecting a 3.6% drop in March. Smaller firms tend to have conservative plans at the start of each fiscal year and revise them up later.
Some market participants expect the BOJ to raise the overnight rate again in July or September, and possibly one more time by year-end or early next year, but the outlook for a steady increase in service prices, the key to anchoring inflation around the bank’s 2% target, remains uncertain as regulated wages for medical, welfare workers and educators have been kept low.
At its latest meeting on June 13-14, the nine-member board decided in a unanimous vote to hold the overnight interest rate target steady in a range of 0% to 0.1% for the second straight meeting after conducting its first rate hike in 17 years and ending the seven-year-old yield curve control framework in March.
Many firms are believed to have returned their responses by mid-June, when the yen’s protracted weakness had already raised concerns among households and businesses that import costs were set to rise further. In late June, the dollar rose to more than 37-year highs above ¥161.
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.
Near-Term Outlook Among Firms Expected to Be Narrowly Mixed
Looking three months ahead, major manufacturers are expected to forecast that their sentiment will rise slightly to 13 in September from an estimated 12 in June while major non-manufacturers are expected to foresee their sentiment will slide further to 33 after an expected drop to 32.
Smaller manufacturers are forecast to see their September sentiment index at 1, up from an estimated -1 (minus 1) in June, while smaller non-manufacturers are expected to project their sentiment would fall to 9 from an estimated 12 as they tend to be cautious about the near-term outlook.
In its monthly report for June, the government maintained its overall assessment that the economy is recovering “moderately” and likely to stay on course, pinning its hopes on more widespread wage hikes and stimulative effects of planned energy subsidies and cash handouts aimed at easing the pain of pensioners and low-income earners hard hit by elevated living costs. It upgraded its view on the world economy as Europe is emerging from the doldrums but also warned that lingering restrictive monetary conditions in other major economies could put a damper on global growth.
Firms May See Higher Inflation Amid Elevated Costs
The June poll is likely to show some firms expect higher inflation, reflecting the highest wage growth in 33 years for workers at large firms in fiscal 2024 and a resumed increase in import costs.
In the March survey, both manufacturers and non-manufacturers see little change in general prices for the coming 12 months, compared to their expectations in the previous survey. At the time, most sectors predicted no change in inflation three years ahead (except for large non-manufacturers) while forecasts were mixed for the five-year period. Large firms continued to expect inflation to fall below the BOJ’s 2% inflation target in the longer run while smaller firms projected inflation would 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 March (2.1% in the previous survey), 1.8% in three years (1.8%) and 1.5% in five years (1.7%). Large non-manufacturers expected 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 Likely to Expect Further Gains in Dollar, Euro Vs. Yen in Fiscal 2024
In the June Tankan survey, Japanese firms are expected to assume the dollar/yen and euro/yen exchange rates to average well above their earlier forecasts. The BOJ is in the process of normalizing its policy, ending the negative short-term interest rate in March and deciding to reduce its Japanese government bond purchases in June, but the pace of its rate hikes is expected to remain only gradual, leaving monetary conditions accommodative in sharp contrast to the Federal Reserve’s restrictive interest rate levels.
In March, firms assumed the dollar/yen exchange rate would average at ¥141.42 for fiscal 2024 in their first estimate (vs. the then market rate of around ¥151) while assuming the euro/yen forex rate would average at ¥151.86 (vs. around ¥163 at the time). Since then, the dollar has continued to climb against the yen, hitting above ¥161, the highest in more than 37 years. The euro is also quoted higher at around ¥172.