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Japan's economic outlook remains cloudy, with the Bank of Japan's latest "tankan" survey showing that business sentiment among large manufacturers snapped its five-quarter rising streak.

According to the central bank quarterly survey, whose results were announced Monday, the headline diffusion index (DI) for large manufacturers' current business conditions stood at plus 18, unchanged from the previous September tankan survey. The DI for large nonmanufacturers improved 7 points to plus 9.

Supply constraints caused by the spread of COVID-19 and rising materials prices have dealt a blow to the country's economic recovery.

With the emergence of the new omicron variant of the virus, the specifics of which are yet unknown, many are worried about what lies ahead for the economy.

High hopes after end of state of emergency

"Since October, after the lifting of a COVID-19 state of emergency (at the end of September), sales of luxury brand bags and clothes, and suitcases have been going up," a representative of a major department store operator said with a sigh of relief.

The latest tankan survey showed that hopes for "revenge consumption," a phenomenon in which people spend actively on goods and leisure activities to satisfy suppressed appetite amid the coronavirus crisis, brightened sentiment at many companies in the services industry.

The DI for large in-person service providers improved sizably to minus 9 from minus 45, and large accommodation, eating and drinking service providers saw their DI rise 24 points although it remained deep in negative territory, at minus 50.

On the other hand, the recovery among manufacturers stalled.

Production cuts at automakers, triggered by difficulties procuring parts amid the coronavirus pandemic, dampened sentiment at many other sectors.

Automobile sales have also stagnated. "Customers are being forced to wait for their cars to be delivered, regardless of model," Suzuki Motor Corp. Senior Managing Officer Toshiaki Suzuki said.

"It's not just semiconductors. Everything else is in short supply," Yoshiharu Inaba, chairman of the Japan Machine Tool Builders' Association, said.

Many manufacturers are wondering when the ongoing shortages of parts will be resolved, industry sources said.

Wary of omicron

In addition to the parts supply issues, manufacturers are being impacted by rising prices of crude oil and materials.

Japan's producer price index in November jumped 9.0% from a year before, the fastest gain since comparable records began in 1981, according to recent BOJ data.

In the December tankan, large manufacturers' input price DI, or the percentage of companies facing higher procurement prices minus that of those seeing the opposite, stood at plus 49, the highest level in about 13 years.

The output price DI for large manufacturers, or the gap between the percentage of firms with rises in the sales prices for their products and that of those seeing falling prices, also rose, coming to plus 16, the highest in around 41 years.

But a BOJ official noted that the input price growth is outpacing the output price rise.

While companies' bottom lines will be pressured if they cannot pass on higher procurement costs fully to retail prices, higher retail prices would put a damper on consumption, analysts said.

Adding to the uncertainty is the omicron variant. JTB Corp. expects 18 million people to travel within Japan during the year-end and New Year holiday season, up 80% from a year before. But the figure is still down 40% from two years before, when the COVID-19 outbreak had yet to become serious, according to the major Japanese travel agency.

"The recovery in demand for international passenger flights may be delayed by the omicron strain," Japan Airlines President Yuji Akasaka said.

Although the number of omicron cases in Japan has so far been low, demand for year-end and New Year parties will likely continue to be lackluster. "The market for izakaya (Japanese-style pubs) has completely shriveled because of the emergence of the omicron variant," said Miki Watanabe, chairman and president of izakaya operator Watami Co..

Around 80% of the companies covered by the December tankan survey submitted their responses to the BOJ before fears over the omicron variant surfaced. This may indicate the possibility that business sentiment fell after the survey, analysts warned.

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