Business / Economy

'Tankan' finds improvement in manufacturers' confidence

Bloomberg, Kyodo

Confidence in the manufacturing sector has risen against expectations, showing resilience in the economy — and perhaps bolstering the case for Prime Minister Shinzo Abe hiking the consumption tax again next year.

The “tankan” index of large manufacturers rose to 13 in September from 12 in June, the Bank of Japan said Wednesday, above a median estimate of 10 in an independent survey of economists. The index is forecast to remain at 13 in December.

“Business conditions have improved in contradiction of market expectations. This is a positive surprise,” economists at SMBC Nikko Securities Inc. said in a report.

Firm sentiment indicates companies are weathering April’s consumption tax rise, which precipitated Japan’s worst contraction in five years in the second quarter. The Abe administration has indicated it is ready to boost stimulus measures to help the economy withstand any further increase in the levy.

The diffusion indexes released by the central bank represent the percentage of companies reporting favorable business conditions minus that proportion reporting an unfavorable environment.

The index for large manufacturers showed the first improvement in two quarters, led mainly by the nonferrous metal industry and carmakers. Looking ahead, this index is expected to stay at 13 in December.

Big services and other nonmanufacturing firms showed deterioration in most of the 12 sectors. They expect a slight recovery to an index reading 14 in three months’ time.

A BOJ official said there is no ground for excessive optimism, as technical factors were partly behind the index’s marginal rise.

But the official also said that “we don’t see a future where (sentiment) continues to fall.”

The BOJ has said the economy is expected to continue its moderate recovery as demand returns. It took a battering with April’s sales tax increase.

“Firms have been maintaining their proactive stance on fixed investment as corporate profits have improved,” BOJ Gov. Haruhiko Kuroda said in a speech Monday. But he noted “some weakness in exports and industrial production.”

The latest tankan also found that large firms across all sectors plan to increase capital spending by an average of 8.6 percent in the current business year through next March from the previous year, up from an estimate in June of 7.4 percent.

The BOJ has maintained aggressive monetary easing since April 2013 to boost the economy and achieve 2 percent inflation next year.

It will hold a policy meeting next Monday and Tuesday and is widely expected to keep its asset purchase program steady because consumer prices have been increasing almost in line with forecasts.

The tankan, however, also showed that risks remain.

Big services and other nonmanufacturing firms marked deterioration in most of the 12 sectors — only construction, power and gas companies showed slight improvement.

The nonmanufacturing sector as a whole expects a slight recovery to an index reading of 14 in three months’ time.

The real estate sector continued to see falling home sales following a sharp rise in demand on last-minute buying ahead of the April 1 consumption tax hike.

Retailers also remained sluggish as the higher sales tax kept household spending depressed. Heavy rain and cooler than usual weather this summer also capped sales at department and convenience stores.

The yen’s depreciation against the dollar to levels unseen in six years resulted in higher costs of imports such as energy and raw materials, negatively affecting the economy. A rise in gasoline prices weighed on transport and postal activities.

Some analysts say the tax increase has effectively cut incomes for wage earners despite recent pay rises across industry.

The tankan showed “companies are very carefully watching whether consumption will recover,” said Tsuyoshi Ueno, senior economist at NLI Research Institute, who added that “it is also a risk to businesses that labor shortages have been increasingly seen at small and medium-size companies.”

The index for small and medium-size firms fell to minus 1 from positive 1 for manufacturers and dropped to zero from 2 for nonmanufacturers. It is expected to recover to zero among manufacturers but deteriorate further to minus 1 for nonmanufacturers.

Prime Minister Shinzo Abe will decide later this year whether to implement a second consumption tax hike in October 2015 as stipulated by a law to accelerate fiscal reconstruction.

Some of his aides have expressed concern that the additional hike could strangle the fragile economic recovery and have called for delay.

Deputy Chief Cabinet Secretary Katsunobu Kato said Abe will make his decision by “looking into various data, particularly July-September gross domestic product.”

He told a news conference that the tankan added to the evidence that the negative impact from the consumption tax increase has somehow eased and that the economy has continued to recover moderately.

Third-quarter GDP will be released in November in a preliminary report, while revised figures are due out in December.

In the latest tankan, the BOJ surveyed a total of 10,369 companies between Aug. 27 and Tuesday, of which 99.3 percent responded.

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