The business mood of Japan’s big manufacturers sank to a near seven-year low in the fourth quarter, a closely watched central bank survey showed, as the U.S.-China trade war and soft global demand weighed on the export-reliant economy.
Companies expect conditions to remain unchanged or even worsen three months ahead, the Bank of Japan’s tankan quarterly survey showed, suggesting that the fallout from the trade conflict could hurt broader sectors of the economy.
But there were some bright signs. Nonmanufacturers’ sentiment appeared to weather the hit from October’s sales tax hike, with companies maintaining robust capital expenditure plans — reinforcing market expectations that the BOJ will hold off on expanding stimulus at next week’s rate review.
“The tankan suggests that the economy is slowing rather than collapsing, so the BOJ is unlikely to cut interest rates at next week’s meeting,” said Marcel Thieliant, senior Japan economist at Capital Economics.
The headline index for big manufacturers’ sentiment stood at zero in December, down from plus five in September and worse than a median market forecast of plus two, the survey showed Friday.
It marked the fourth straight quarter of decline and hit the lowest reading since March 2013, a month before BOJ Gov. Haruhiko Kuroda deployed his “bazooka” monetary stimulus intended to pull Japan out of deflation.
Underscoring the pain from the trade war, an index gauging big automakers’ sentiment turned negative for the first time in more than three years.
Some steel and cement makers also saw demand ahead of the 2020 Tokyo Olympic Games peak, a BOJ official told reporters.
“The weakness in automakers’ sentiment is noteworthy. The global economy is taking longer to recover and that uncertainty is affecting Japanese companies,” said Tsuyoshi Ueno, senior economist at NLI Research Institute.
A sales tax hike that was put in place in October weighed on the service sector, with the index for big non-manufacturers slidingto plus 20 from plus 21 in September. But the reading exceeded a Refinitiv estimate of plus 17.
“Domestic demand wasn’t hurt much by the sales tax hike so far. Public works projects to be earmarked under the government’s spending package will underpin growth,” said Mari Iwashita, chief market economist at Daiwa Securities.
Big firms plan to increase capital expenditure by 6.8 percent in the current business year, set to end March 31, up slightly from their plan made three months ago, the survey showed. It compared with a median market forecast of a 6.0 percent gain.
The reading backs the BOJ’s view that robust corporate spending plans will keep domestic demand firm and help the economy weather heightening overseas risks, analysts say.
“Domestic demand may slow temporarily … though in the long-term, it will stay resilient,” said BOJ Deputy Gov. Masayoshi Amamiya on Thursday, adding that now is the time to stand pat and carefully watch upcoming data.
Capital expenditure has been among the few bright spots in Japan’s economy as companies continue to invest in high-tech and labor-saving technology to cope with a labor crunch.
The economy expanded at a much faster pace than was initially reported in the third quarter, as solid domestic demand and business spending offset the pain from weak exports and output.
But many analysts anticipate a slowdown this quarter as the October sales tax hike weighs on consumption.
Earlier this month, in a bid to bolster the country’s economy, Prime Minister Shinzo Abe’s Cabinet approved a package of stimulus measures worth ¥26 trillion to be financed by an extra budget for fiscal 2019 and the fiscal 2020 budget.
The survey’s sentiment indexes are derived by subtracting the number of respondents who say conditions are poor from those who say they are good. A positive reading means optimists outnumber pessimists.
The index for large manufacturers is forecast to remain at zero in the next quarterly survey, as some people expect trade tensions between Washington and Beijing to ease while others see the global economic outlook remaining cloudy, a BOJ official said.
Among large manufacturers, 11 out of a total of 16 sectors posted declines from the previous quarter. Automakers’ sentiment fell to minus 11 in December from plus 2 in September, dropping into negative territory for the first time since June 2016, while that of metal product makers slipped to minus 14 from minus eight.
“Many manufacturers still voiced concerns over the prolonged U.S.-China trade tensions and a global economic slowdown,” the BOJ official told reporters.
In the nonmanufacturing sector, sentiment among retailers dropped to minus three from plus four, logging the first minus figure since December 2014. The BOJ official also attributed the fall to a strong typhoon that caused severe damage in many parts of the country in October.
But sentiment in the accommodation, eating and drinking services sector improved to 11 from nine, supported by robust spending by foreign tourists during this autumn’s Rugby World Cup, which was hosted by Japan.
The BOJ surveyed 9,681 firms between Nov. 13 and Thursday, of which 99.6 percent responded.