A 19-month rally in business confidence slowed sharply in the first quarter amid rising consumer prices spurred by the tax hike in April, the Bank of Japan said Tuesday. It was the first deterioration in six consecutive quarters.
The Tankan survey for the April-June quarter showed confidence among large manufacturers stood at positive 12, well short of market expectations, after hitting positive 17 in the preceding quarter — its highest level in more than six years.
The decline was the first since Prime Minister Shinzo Abe took office in late 2012 pledging to kick-start the world’s number-three economy, and it questions the strength of Japan’s recovery.
Meanwhile, the Tankan reading for large companies in the non-manufacturing sector tumbled to plus 19 from plus 24 in the March quarter, another first downturn in six quarters.
The business sentiment index measures the difference between the percentage of firms that are upbeat about business conditions and those that see them as unfavorable.
A positive figure means a majority are optimistic.
The closely watched survey of more than 10,000 companies is the most comprehensive indicator yet of how Japan is coping with the impact of the nation’s first sales tax rise in 17 years.
Consumer spending took a hit after Japan raised its sales tax to 8 percent from 5 percent on April 1, with millions of shoppers making a last-minute dash to stores ahead of the increase.
The rise was seen as essential if Japan is to pay off its mammoth national debt, by many measurements the world’s largest. However there were fears it would slow growth and possibly derail Abe’s plan to turn around the economy.
The Tankan survey came a day after government data showed that Japan’s factory output rose 0.5 percent in May from a month earlier, less than expected.
Household spending and housing starts, a measure of new home construction, have also turned down as Japanese consumers face higher prices due to the tax rise and creeping inflation — the result of the central bank’s efforts to conquer years of deflation and slow growth.
However, other recent data showed unemployment edged down to 3.5 percent in May, the lowest level in nearly 17 years, with signs of a tightening labor market.
That will add pressure on firms to raise wages to attract workers, economists said, after major companies wrapped up spring labor negotiations with pay rises for the first time in years.
Also on a brighter note, the Tankan showed big firms’ plans for capital spending were picking up since the last survey and many economists expect activity to recover in the third quarter.
Abe swept to power promising to kick the economy out of a cycle of falling prices and lackluster growth, which would see consumers put off purchases in the hopes of getting goods cheaper down the road.
That, in turn, hurt producers and held back their expansion and hiring plans.
The last time Japan brought in a higher sales levy, in 1997, it was followed by years of deflation and tepid economic growth that defined the country’s protracted slump.