The Bank of Japan’s latest “tankan” quarterly survey of business confidence paints a mixed picture of the Japanese economy, but worrying signs appear to outweigh the bright spots. The government’s scenario of a steady recovery following the backlash against the consumption tax hike in April may be further in doubt.
The marginal increase in the business confidence index — the percentage of firms reporting favorable conditions minus that of companies reporting negative environment — among large manufacturers marks the first improvement in six months. However, sentiments among nonmanufacturers and small companies in all sectors continued to worsen.
The confidence among large manufacturers was apparently aided by the recent steep fall of the yen, which boosts the foreign currency-denominated earnings of export-oriented firms in yen terms. But the decline of the yen, which hit ¥110 against the dollar on Wednesday for the first time in more than six years, is not necessarily a boon for others.
The consumption tax hike and the rising prices — exacerbated by the higher cost of imports because of the weak yen — weigh heavily on consumer spending as households continue to face net income declines as prices have increased faster than wage hikes.
Among large firms, business sentiments turned for the worse in 10 of the 12 nonmanufacturing sectors covered in the BOJ survey, and companies in these sectors foresee only a marginal improvement in the months ahead.
Particularly weak was confidence in sectors related to personal consumption, such as food, retail, hotels and restaurants. Consumer spending, which accounts for some 60 percent of Japan’s gross domestic product, continues to fall sharply on year-on-year basis since April, with consumption during the summer also dampened by heavy rains in parts of the country and cool weather.
While the yen’s fall boosts the earnings of export-led manufacturers, it has not increased the nation’s exports as much, because many firms have already shifted production abroad or are no longer competitive in the overseas markets.
While the confidence of automakers picked up sharply in the latest survey, they expect conditions to worsen in coming months, given the uncertainties over a slowdown in emerging markets and the stagnant growth of European economies.
Such an economic state for Japan raises serious questions about whether the policies introduced since Prime Minister Shinzo Abe took office in December 2012 — such as the BOJ’s aggressive monetary easing, the government’s large fiscal stimulus and tax cuts on businesses — are having the desired effects of putting Japan on the path of self-sustained recovery.
Japan’s economy shrank at an annualized pace of 7.1 percent during the April-June period following the 6.1 percent growth in the preceding quarter, which reflected robust demand for last-minute purchases ahead of the consumption tax hike. Abe is set to decide on whether to go ahead with the planned second increase in the consumption tax to 10 percent next year after reviewing the revised July-September GDP data, due out in early December.
Uncertainties over the course of the economy may trigger calls for yet more fiscal stimulus and monetary easing. But the Abe administration and the BOJ should carefully consider whether to resort to such steps, because not only is it doubtful that taking more of the same measures will benefit the economy but a repeat of the quick fixes could have the effect of masking the real problems with the economy and the ways to remedy them.