–Major Non-Manufacturers’ Confidence Seen Up for 8th Straight Quarter on Post-Covid Spending by Foreign Visitors
–Many Sectors Expected to be Cautious Ahead amid Slow China Recovery, Geopolitical Risks
–Large Firms Seen Projecting Solid Capex Plans in Fiscal 2024; Smaller Firms Likely to See Cautious Start as Usual
By Max Sato
(MaceNews) – The Bank of Japan’s quarterly Tankan business survey is expected to show confidence among manufacturers slipped back in March after improvement in December as suspended vehicle output over a safety test scandal has triggered a widespread slump in overall production, while sentiment among non-manufacturers is expected to have improved further, led by hotels, restaurants and retailers amid strong post-Covid inbound spending.
The BOJ will release the results of its Tankan business survey conducted from late February through late March at 0850 JST on Monday, April 1 (1950 EDT/2350 GMT Sunday, March 31).
The Tankan diffusion index showing sentiment among major manufacturers likely posted its first drop in four quarters, sliding back to 10 from 13 (revised from 12) in December, when it rose more than expected from 9 in September. December’s reading of 13 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 forecast at 33, which would be the highest since 33 in December 1991 and the eighth straight quarterly increase after rising to 32 (revised from 30) in December from 27 in September.
The BOJ has shuffled sample corporations in the Tankan survey, resulting in revisions to prior figures. Sample firms are revised once every two to three years to reflect changes made to the government database.
Major firms are expected to project their plans for business investment in equipment would rise a combined 10.4% on the year in fiscal 2023 ending in March 2024, revised down from the 13.2% increase (revised from 13.5%) planned in the December survey. Their plans for fiscal 2024 are forecast to be a 3.0% increase over the previous year. A year ago, large firms projected a 3.2 percent increase for fiscal 2023, a solid start given slowing global demand and concerns about banking failures in the US and Europe at the time.
Smaller firms are also expected to lower their combined capital spending plans to a 7.8% increase in fiscal 2023 after raising them to an 8.3% rise (revised from 10.3%) in December. For fiscal 2024, smaller firms are expected to project a 1.0% drop, compared to an unusually bullish 1.4 percent rise planned in March 2023. Small businesses tend to forecast a decline at the start of the new fiscal year and revise up their plans later in the year.
At its previous meeting in March, the board decided in a majority vote to end the seven-year-old yield curve control framework and conducting the bank’s first rate hike in 17 years by lifting the negative short-term interest rate target. BOJ officials have stressed that the policy change should not be seen as tightening and that financial conditions will remain accommodative for now.
Many firms are believed to have returned their responses by mid-March. It was before the March 18-19 policy meeting but financial markets had priced in a policy shift based on reports that major firms had agreed to raise wages at a faster pace for fiscal 2024. On the downside, data released in late February showed that industrial production plunged in January, hit by suspended vehicle output, and consumer spending was sluggish amid high living costs.
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 Expected to Be Cautious about Near-Term Outlook
Looking three months ahead, major manufacturers expect their sentiment to pick up slightly to 12 in June from an estimated 10 in March while major non-manufacturers are expected to forecast their sentiment will slide to 30 after an expected improvement to 33.
In its monthly report for March, Japan’s government maintained its overall assessment, saying the economy is recovering moderately despite some soft spots and in light of clearer signs that many firms are raising wages at a faster pace. But it also repeated its warning against downside risks from the Chinese slowdown, the Middle East conflict, inflation and the effects of the powerful New Year’s Day earthquake in the northwestern region of Hokuriku that has reduced electronic parts supply and battered tourism.
The sentiment index for smaller manufacturers is forecast at -2 (minus 2) in March, down from 2 (revised from 1) in December, which was the first positive reading since 6 (plus 6) in the March quarter of 2019.
The index for their non-manufacturing counterparts is expected to post its eighth consecutive improvement in March, rising to 15 from 14 in December, which was the best reading since 21 in September 1991.
Smaller manufacturers are forecast to see their June sentiment index at -2 (minus 2), unchanged from an estimated -2 (minus 2) in March, while smaller non-manufacturers are expected to project their sentiment would fall to 10 from an estimated 15.
Firms See Inflation Below BOJ’s 2% Target in Longer Term
In December, most sectors predicted no change to slightly slower inflation three to five years ahead. Large firms continued to expect inflation to fall slightly 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 now (2.1% in the previous survey), 1.8% in three years (1.8%) and 1.6% in five years (1.7%). Large non-manufacturers expect inflation at 2.0% in a year (2.0% previously), 1.6% in three years (1.6%) and 1.4% in five years (1.5%).
Firms Likely to Expect Firm Dollar, Euro Vs. Yen in Fiscal 2024
In the March quarter Tankan survey, Japanese firms are expected to assume the dollar/yen and euro/yen exchange rates to average above the current levels in fiscal 2024 in their first estimate.
The interest rate differential between the U.S. and Japan remains wide after the BOJ’s small step toward normalizing its policy in March and expectations that the Federal Reserve will be cautious about cutting rates. Investors continue seeking higher returns, weighing on the yen.
In December, Japanese firms assumed the dollar/yen exchange rate to average at ¥139.35 for fiscal 2023, up further from ¥135.75 provided in September, while assuming the euro/yen forex rate to average at ¥148.80, also up further from ¥144.62 seen three months ago.