Japan business outlook brightens with modest improvement

Apr. 3, 2017 – Encouraged by stronger export orders, Japanese manufacturers are feeling a bit more upbeat than they were late last year, according to a quarterly survey by the Bank of Japan released Monday.

The central bank’s “tankan” report put sentiment among large manufacturers at 12, up from 10 in December. Medium-sized and small companies also were more optimistic.

The survey’s findings fell slightly below economists’ forecasts. But they were seen as a sign that improved exports are underpinning growth in the world’s No. 3 economy as China’s economy stabilizes.

Masamichi Adachi of J.P.Morgan described the results as a “B,” or “not good but not bad.”

The improvement is “basically consistent with our bullish view on the current Japanese economy,” Adachi said in a research note. “Some improvement of business sentiment with persistent cautiousness is probably in line with the BOJ’s view, as well,” he said.

For the current April-June quarter, firms of all sizes forecast a slight deterioration in operating conditions, which is typical when conditions are favourable, said Marcel Thieliant of Capital Economics.

“The survey suggests that growth will remain strong for now,” Thieliant said.

A separate, monthly survey of purchasing managers, Nikkei Japan Manufacturing, also showed improved conditions. The latest reading of 52.4 was down slightly from March’s reading of 53.3 on a scale where 50 marks the cutoff between expansion and contraction.

Japan’s exports to the rest of Asia, especially China, have recovered as Chinese factory activity has picked up amid a prolonged slowdown.

But Japan’s own recovery remains vulnerable: Prime Minister Shinzo Abe has twice delayed a sales tax increase to avoid shocks to the economy. The BOJ, meanwhile, is injecting tens of billions of dollars a month into the economy through purchases of assets, mainly Japanese government bonds.

The weak links in the strategy have been lower-than-expected corporate investment and consumer spending. While unemployment sank to a 22-year low last month of 2.8 per cent, companies have so far kept wage increases to a minimum.

The BOJ’s survey showed large manufacturers intend to increase spending on factories and equipment by only 0.6 per cent in this fiscal year, which began April 1. Overall, companies plan to cut such capital spending by 1.3 per cent.

But capital outlays often increase during the year, Thieliant noted.

The survey of 10,799 companies was conducted from late February to the end of March. Readings are based on the difference between those surveyed who say conditions are good and those who say they are unfavourable.