‘Tankan’ signals drop in spending

With spring tax hike, CEOs wary recovery might be unsustainable

Bloomberg

Large Japanese businesses pared their projections for capital spending this fiscal year, signaling headwinds for Abenomics as a sales-tax rise looms in April.

Big firms plan to boost spending 4.6 percent in the year ending next March, the quarterly Bank of Japan “tankan” report said Monday. That compared with a 5.1 percent projection three months earlier. The slide contrasted with an increase in sentiment among large manufacturers to the highest level since 2007.

Prime Minister Shinzo Abe is trying to persuade businesses to raise wages and investment as part of efforts to catapult the nation out of a 15-year deflationary malaise. While the yen’s slide to a five year-low against the dollar last week highlighted the boost to exporters from his “Abenomics” economic policies, companies aren’t convinced the recovery will be sustained.

“We still don’t find any evidence that corporates are really starting to get confident about the sustainability of the recovery and actually ramping up domestic investment,” Izumi Devalier, a Japan economist at HSBC Holdings PLC in Hong Kong, told Bloomberg Television. “And that remains a worry in an environment where consumption is going to weaken next year.”

The tankan index for sentiment among large manufacturers was at 16 in December, up from 12 in September. The median estimate of 23 economists surveyed by Bloomberg News was for a reading of 15.

Chief Cabinet Secretary Yoshihide Suga said Monday the survey greatly exceeded expectations and the government will pursue economic policies with confidence.

Monday’s report shows that more large companies forecast input prices rising than falling in the first three months of 2014. Output prices are seen as declining, indicating firms lack confidence in passing on costs.

The businesses’ inflation outlook is a source of concern, said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. “Input prices have to be passed on to output costs to ride out the effects of the sales-tax rise,” he said.

Firms are more pessimistic in their outlooks for next quarter. The tankan was conducted from Nov. 14 to Dec. 13 and surveyed 10,509 businesses.

A measure of the outlook at large manufacturers increased to 14 from 11 in the previous survey. Across all industries, including services, big companies plan to boost spending by 4.6 percent in the year ending next March, compared with the 5.1 percent projection in the report three months earlier.

Large companies from all industries plan to increase investment by 8.2 percent in the second half of this fiscal year compared with the same period last year, after capital spending was unchanged in the first six months of the year.

Gains in capital spending and wages are needed to prevent Japan’s recovery from fading as stimulus steps wear off. Pay excluding overtime and bonuses fell for a 17th month in October.