Business confidence among large manufacturers rose in March from three months earlier for the fifth straight quarterly improvement, the Bank of Japan said Tuesday in its “tankan” report, but many companies were wary about prospects amid fear of weakening demand after the consumption tax hike.
The report’s headline index measuring sentiment among big manufacturers such as carmakers and high-tech companies increased to plus 17 from December’s plus 16, slightly lower than the average forecast of plus 18 in a Kyodo News survey.
The figure was the highest since December 2007, reflecting brisk consumer spending before Tuesday’s consumption tax hike to 8 percent from 5 percent.
The quarterly survey showed sentiment among nonmanufacturing companies such as those in construction and services improved to plus 24 from plus 20 in the previous quarter, matching the average estimate and the highest since November 1991, soon after the collapse of the bubble economy.
But many businesses expressed a cautious outlook, mirroring concerns about weakening demand after the hike in the consumption tax. Major manufacturing companies expect sentiment to deteriorate by 9 points to plus 8 in the next three months, while large nonmanufacturers expect sentiment to worsen by 11 points to plus 13.
“The outlook reflected concerns about a slowdown in domestic demand stemming from the consumption tax hike after such demand was boosted by last-minute buying,” said Koya Miyamae, senior economist at SMBC Nikko Securities Inc. “The companies are inclined to show their wariness because of the economy’s uncertain prospects.”
The diffusion index represents the percentage of companies reporting favorable business conditions minus those describing unfavorable environments.
“The effects of ‘Abenomics’ are appearing,” Finance Minister Taro Aso said at a news conference, referring to Prime Minister Shinzo Abe’s economic policies. “We have to steadily implement stimulus measures and a supplementary budget,” taking into consideration the impact of a demand decrease from April, he added.
By industry, the index of major carmakers increased 5 points to plus 36, also lifted by favorable earnings thanks to a weakening yen, while sentiment at large retailers surged 13 points to plus 24 due to solid domestic demand before the tax hike.
But both major automakers and retailers expect sentiment to deteriorate considerably in the next three months, with carmakers projecting the index to plunge by 38 points to minus 2 and retailers forecasting it to slide by 29 points to minus 5.
“A deterioration was expected in a wide range of sectors,” which could partly be affected by a slow recovery in Asia, mainly in the region represented by the Association of Southeast Asian Nations, said Yuichiro Nagai, an economist at Barclays Securities Japan Ltd.
But the latest survey results showed that the index was higher with both manufacturers and nonmanufacturers compared with March 1997, when the consumption tax was raised to 5 percent from 3 percent.
Nagai said that companies appear to have been taking steps to avoid the adverse impact of the tax increase, such as inventory management, giving themselves more strength to withstand unfavorable economic conditions.
The index at small companies in all industries improved for the fifth straight quarter, indicating economic recovery has spread among smaller firms. The index rose 4 points to plus 7, highest since November 1991. But they expect sentiment to worsen by 12 points to minus 5.
The BOJ said large firms in all industries plan to raise capital spending by 0.1 percent in fiscal 2014, higher than the average forecast of a 0.3 percent decline.