The business sentiment index for major Japanese manufacturers increased by two points to 13 in June, reflecting the first improvement in two quarters. This positive change comes as the impact of an auto safety data-rigging scandal began to ease. However, the outlook remains cautious due to rising costs, as indicated by the data from the Bank of Japan.
Meanwhile, the sentiment index among nonmanufacturers, including service providers like hotel operators, declined to 33 in June from 34. This marks the first decrease in 16 quarters following a period of consistent improvement driven mainly by a revival in inbound tourism. Many companies now express concerns about inflation and labour shortages, according to the Tankan quarterly survey. The Tankan index measures the percentage of companies reporting favourable conditions minus those reporting unfavourable ones. The average market forecast for the large manufacturers’ index, compiled by Kyodo News, predicted an improvement to 12.
The data reveals a divergence in how different companies and sectors are handling rising energy and raw material costs, exacerbated by a weak yen. Sentiment improved in sectors like raw materials that have successfully passed on costs, such as pulp and paper. However, sectors like food and steel became less optimistic due to inflation concerns.
Yoshimasa Maruyama, chief economist at SMBC Nikko Securities Inc., commented that overall business sentiment is good. He noted that the key issue is when, not if, the auto scandal’s impact will end for manufacturers. Many firms have managed to pass on costs by raising prices, which is a positive development, but retailers are struggling with weak consumer demand.
Daihatsu Motor Co. suspended production after admitting in December that it had rigged safety data, resuming full output in May. This fraud was followed by revelations of improper vehicle certification tests at Toyota Motor Corp. and Mazda Motor Corp., among others, leading to the suspension of some model shipments. Although the mood among automakers remains positive, their index fell by one point to 12. Retailers, however, saw their sentiment worsen to 19, down 12 points, as Japanese households have yet to experience real wage growth due to inflation.
The yen’s persistent depreciation, especially against the U.S. dollar, continues to drive higher import costs and accelerate inflation in resource-poor Japan. Despite this, a weak yen benefits exporters by boosting overseas profits when repatriated and makes travel and shopping in Japan cheaper for foreign tourists. Hotel and restaurant operators, along with other face-to-face service providers, remained optimistic despite a slight decline in the sector index.
Japanese companies expect the dollar to trade at 144.77 yen in fiscal 2024, up from 141.42 yen in the previous survey in March. The dollar even rose above 161 yen at one point last week, raising market vigilance about possible intervention by Japanese authorities to slow the yen’s decline. The Japanese economy contracted at an annualised real rate of 2.9 percent in the January-March quarter, a sharper decline than the initially reported 1.8 percent, underscoring weak domestic demand. Nonetheless, Japanese companies plan to increase capital spending by 8.4 percent in the year to next March, following a 10.6 percent rise in fiscal 2023, as shown in the BOJ survey. This figure includes all sectors and small and medium-sized firms.
Looking ahead, manufacturers are more optimistic, with sentiment improving from 13 to 14, while nonmanufacturers expect sentiment to worsen by 6 points to 27. The latest data will be reviewed at the BOJ’s policy-setting meeting in late July.
Maruyama from SMBC Nikko remarked that rising prices and the weaker yen might prompt the BOJ to act, but it must also consider weak consumption, as evidenced by the declining sentiment among retailers. Markets are keen to see the extent to which the Japanese central bank will reduce its purchases of Japanese government bonds, with board members recently suggesting the need to raise interest rates again if the yen’s weakness further drives inflation.
The BOJ surveyed 9,076 companies, with a response rate of 99.2 percent between May 29 and last Friday.
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