–End to Covid Lockdown in Shanghai Supports Factory Operations
–Downside Risks Arise from Global Slowdown amid Tightening by US, Others
–Spike in Japan Covid Cases, High Import Costs Hit Services Sector
–Business Confidence in December Projected to Be Mixed
–Smaller Firms Expected to Revise Up Their Combined FY22 Capex Plans Further
By Max Sato
The BOJ will release the results of the Tankan survey conducted from late August until late September at 0850 JST Monday, Oct. 3 (1950 EDT/2350 GMT Sunday, Oct. 2). Many firms are believed to have returned their responses by mid-September, when the drag from the seventh wave of the pandemic in Japan had shown signs of receding.
The survey is also expected to show 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, are seen little changed from three months earlier.
The government refrained from imposing strict public health rules, allowing the economy to reopen further in the summer months despite another surge 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.
Expected key points from the Tankan
* The Tankan diffusion index showing sentiment among major manufacturers is forecast at 11 in September (forecasts ranged from 8 to 12), up slightly from 9 in June but below 14 in March and 18 in both December and September last year, when it rose from 14 the previous quarter, according to the median projection by 10 economists compiled by Mace News. Only one economist predicted the index would fall slightly from June.
* The Mace News median forecast for the index measuring sentiment among major non-manufacturers is 12 for September (ranging from 7 to 15), down slightly from 13 in June but it would be above 9 in both March and in December and 2 in September last year.
* Looking three months ahead, economists expect the sentiment index for major manufacturers to be unchanged at 11 (range: 9 to 13) in December and that for major non-manufacturers to improve further to 15 (range: 10 to 19).
* The sentiment index for smaller manufacturers is forecast at -3 (-5 to -1) in September, up slightly from -4 in both June and March and following -1 in December and -3 in September last year. Four of the 10 economists expect the index to be unchanged while only one projects it will fall. The index for their non-manufacturing counterparts is seen at -2 (range: -6 to 0), down slightly from -1 three months earlier but above -6 in March, -4 in December and -10 in September 2021.
* Sentiment among smaller manufacturers for December is forecast to slip back to -4 (range: -7 to -2) and that for smaller non-manufacturers is seen edging lower further to -3 (range: -8 to +2).
* 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.
* The Tankan is also expected to show that major firms, backed by record profits in the April-June quarter, plan to maintain their plans for sharply increasing business investment in equipment by a combined 18.1% (forecasts by nine economists range from +16.0% to +20.3%) in fiscal 2022 ending next March, little changed from a 18.6% rise planned in June but up from an estimated 2.3% drop for fiscal 2021. Their first projection for capex plans in the current fiscal year shown in the March survey was a modest 2.2% rise.
* Smaller businesses are expected to report their capex plans for fiscal 2022 would rise by a combined 1.6% from the previous fiscal year (range: -1.3% to +3.7%), revised up from a 1.4% fall projected in the previous survey. Smaller firms tend to raise their plans later in the fiscal year. Their combined capital investment for fiscal 2021 was estimated to have increased 6.2% in the June survey.
* 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 monthly Economy Watchers Survey, which was conducted by the Cabinet Office from Aug. 25 to Aug. 31 and released on Sept. 8, indicated that the Japanese economy is tiding over the drag from the seventh wave of the pandemic as the government has refrained from imposing strict public health rules while the numbers of Covid infections surged to record highs from late July through August.
* The Watchers’ sentiment index showing the direction of Japan’s current economic climate posted the first monthly rise in three months, edging up 1.7 points to 45.5 in August on a seasonally adjusted basis, after slumping 9.1 points to a five-month low of 43.8 in July, dipping 1.1 points to 52.9 in June and rising 3.6 points to 54.0 in May. The index remained under the key 50 line after slipping into the territory in July for the first time since April and stayed well below the 16-year high of 57.5 hit in December 2021.
* The Watchers’ outlook index, which shows sentiment in two to three months, also marked the first gain in three months, rebounding 6.6 points to 49.4 in August, after falling 4.8 points to a six-month low of 42.8 in July, slipping 4.9 points to 47.6 in June and rising 2.2 points to 52.5 in May. January’s 7.8-point decline to 42.5 was the lowest since 36.9 in December 2020.