Japan's key manufacturing business confidence index rose 2 points to 13 in June, the first improvement in two quarters, as the impact of the auto safety data fraud scandal eased, Bank of Japan data showed on Monday, but rising costs are clouding the outlook.
The business confidence index for non-manufacturing sectors, which includes accommodation and other service sectors, deteriorated to 33 from 34 in June, the first decline in 16 quarters, after a strong improvement mainly due to a revival of inbound tourism. Many businesses are now expressing concerns about inflation and labor shortages, according to the Tankan quarterly survey.
The Tankan index is calculated by subtracting the percentage of companies that responded that the economic situation is bad from the percentage of companies that responded that the economy is good, and the average market forecast for large manufacturing companies compiled by Kyodo News had been expected to improve to 12.
The data highlighted differences in how well companies and industries are coping with rising energy and raw materials costs, exacerbated by the weak yen.
Business sentiment improved in sectors that deal with raw materials such as pulp and paper, where costs were able to be passed on, but optimism has faded in the food and steel sectors due to concerns about inflation.
Yoshimasa Maruyama, chief economist at SMBC Nikko Securities, said, “Corporate business sentiment is generally good.”
“The question is not when the impact of the auto scandal on manufacturers will end, but if it will end. Many companies have been able to pass on costs by raising prices, which is a positive development, but retailers are suffering from weak consumer demand,” he said.
Daihatsu Motor Co. suspended production in December last year after admitting to falsifying safety data, but resumed full production in May. Later, Toyota Motor Corp. and Mazda Motor Corp. were found to have falsified vehicle certification tests, leading to the suspension of shipments of some models.
Mood among automakers remained positive, but the index fell one point to 12.
However, with Japanese households yet to feel the effects of rising real wages due to inflation, retailer business confidence fell 12 points to 19.
In particular, the yen's continued decline against the US dollar means that import costs will continue to rise in resource-poor Japan, accelerating inflation.
But a weaker yen is a boon for exporters, who can repatriate profits earned overseas, and it makes it cheaper for foreign tourists to travel to and shop in Japan.
Hotel and restaurant operators and businesses offering in-person services maintained their optimistic outlook despite a slight decline in the sector index.
Japanese companies are forecasting the dollar to trade at 144.77 yen against the yen in fiscal 2024, up sharply from 141.42 yen in the previous survey in March. The dollar briefly surpassed 161 yen against the yen last week amid growing market caution that Japanese authorities might intervene to stem the yen's sharp decline.
Japan's economy contracted at a real annualized rate of 2.9% in the January-March quarter, instead of a 1.8% decline, according to revised data released on Monday, highlighting weakness in domestic demand.
Still, a Bank of Japan survey shows Japanese companies plan to increase capital spending by 8.4% in the year to next March, following a 10.6% increase in fiscal 2023. The figure covers all industries and includes small and medium-sized enterprises.
Looking ahead, manufacturers are more optimistic, with business sentiment improving from 13 to 14, while non-manufacturers expect their business sentiment to deteriorate six points to 27.
The latest data will be included in materials to be evaluated at the Bank of Japan's policy meeting in late July.
SMBC Nikko's Maruyama said, “Rising prices and a weak yen may spur the BOJ to take action, but they also need to take into account weakness in consumption, as seen in declining business confidence among retailers.”
Markets are watching to see how much the Bank of Japan will reduce its bond purchases, after central bank governors recently said they may need to raise interest rates again if a weaker yen leads to higher inflation.
The BOJ surveyed 9,076 companies, with 99.2% of them responding between May 29 and Friday.
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