Japanese business sentiment improved for the second straight quarter in the October to December period, a key central bank survey showed on Monday, a welcome sign for the economy as it continued to emerge from the initial hit of the coronavirus pandemic.
But companies slashed their capital expenditure plans for the year ending in March, as a recent resurgence of infections reinforces expectations that any recovery in the world's third-largest economy will be fragile.
The headline index for big manufacturers' sentiment improved to minus 10 in December from minus 27 in September, the Bank of Japan's closely watched tankan survey showed.
It was better than the minus 15 projected in a Reuters poll and the fastest pace of improvement since 2002, as Japanese car and auto parts makers benefitted from a global rebound in automobile demand, the survey showed.
Big nonmanufacturers' sentiment also recovered to minus 5 from minus 12 in September, roughly matching a Reuters poll of minus 6, the survey showed.
The short-term business sentiment survey reports the difference between the percentage of firms that are upbeat and those that see conditions as unfavorable.
A negative reading means more companies are pessimistic than optimistic. It is considered to be the broadest indicator of how Japan Inc. is faring.
"A stronger-than-expected rebound in factory output midyear and a recovery in overseas economies, notably China, helped improve manufacturers' sentiment," said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute.
"But companies likely won't raise capital expenditure much next fiscal year given the renewed rise in COVID-19 cases."
While Japan avoided the high case numbers seen elsewhere when the coronavirus first hit, infections have risen as winter sets in, hitting a daily record Saturday.
A government campaign offering discounts for domestic travel helped lift sentiment among industries ranging from hotels, restaurants and retailers, a BOJ official said during a briefing.
But big firms plan to cut their capital expenditure by 1.2% in the current business year to March 2021, a sign slumping profits and uncertainties over the outlook were discouraging firms to ramp up spending.
It was a downgrade from their plan to raise capital spending by 1.4% made in the September survey and compared with market forecasts for a 0.2% cut in expenditure.
Companies expect recurring profits to fall 35.3% this fiscal year as sales are seen slumping 8.6%, the tankan showed.
An index gauging firms' sentiment three months ahead worsened, suggesting that many of them feel conditions won't improve much despite recent progress in vaccine development.
Companies also plan to slash new graduate hiring by 6.1% in the year beginning in April, the survey showed, which would be the most cautious hiring plan since the collapse of Lehman Brothers shook the global economy in 2010.
"Uncertainty over the outlook is weighing on companies' sentiment," said Yusuke Shimoda, senior economist at Japan Research Institute. "Unless people feel safe about going out, it would be difficult for government stimulus measures to yield results."
After suffering its worst postwar contraction in the second quarter, Japan's economy rebounded in July-September helped by improved exports and consumption.
The latest survey also comes ahead of the Bank of Japan's two-day monetary policy meeting from Thursday, which is widely expected to keep the current monetary easing tools but also likely to extend its special measures in response to COVID-19.
"We think the BOJ will explain that the economy continues to need policy support, especially with higher uncertainty due to the arrival of a third wave of infections," UBS economists Masamichi Adachi and Go Kurihara said in a report.
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