Gloomier Japanese Manufacturers Unlikely to Move Needle at BOJ

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Fears over the global economy and the impact of a sales tax have made Japanese manufacturers gloomier about business conditions, but not likely by enough to push the Bank of Japan closer to extra stimulus later this month.

Confidence among the country’s biggest product makers, which include household names such as Toyota, Sony and Canon, fell to 5 from 7, according to the BOJ’s quarterly Tankan survey released Tuesday. While that was the worst reading in more than six years, sentiment showed far more resilience than expected by economists who had estimated the index would slide to 1.

The positive number means optimists among manufacturers still outnumber pessimists despite nine straight months of falling exports and trade tensions between the U.S. and China that cloud the outlook for global growth.

The Tankan release followed figures showing continued strength in the labor market, with unemployment holding steady at the lowest level since October 1992. Neither result painted a picture of an economy in need of urgent central bank support.

The BOJ meets on Oct. 30-31 amid heightened expectations it might take additional action to support growth and inflation. After its meeting last month, BOJ Governor Haruhiko Kuroda said he had grown more inclined to add stimulus. The central bank also called for a review of whether overseas developments risked killing off Japanese inflation.

Key Insights

• The results come with Japan’s economy at a vulnerable moment with a sales-tax hike implemented Tuesday expected to sap domestic spending. Economists expect a 2.7% GDP contraction in the fourth quarter as consumers pull back.
• Capital spending was among the weaker results in the Tankan, with investment plans for the year ending next March rising 6.6%, less than in the previous survey. The BOJ is paying particular attention to how sagging sentiment is affecting business investment, a key prop for the economy given weakness in export demand.
• Big companies outside the manufacturing sector, which have supported growth given the weakness among manufacturers, continued to show greater optimism, though sentiment fell to 21 from 23 three months ago.
• “You can’t say that this Tankan shows weakness among manufacturers is starting to affect domestic demand,“ said Hideo Kumano, economist at Dai-Ichi Life Research Institute. “This is a good outcome for the BOJ that doesn’t ramp up pressure on them to act.”
• Delving into the figures, economists noted improved sentiment among electrical equipment makers, a potential early sign that they see the worst of the global tech slump as over.
• A sharp deterioration in the mood of firms in the accommodation and restaurant sector may point to expected drops in inbound tourism as a spat between Tokyo and Seoul deters Korean travelers visiting Japan, some economists said.

What Bloomberg’s Economist Says

“The deterioration in confidence of big manufacturers in the Bank of Japan’s Tankan survey wasn’t as sharp as we had expected. The grim view on the outlook, though, shows weakening external demand is starting to hurt. Scaled-backed investment plans indicate that a third straight quarter of souring sentiment is impacting spending decisions.”

--Yuki Masujima, economist

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• An index that measures large manufacturers’ view of the outlook looking three months ahead registered 2, better than analysts’ forecast of 0.
• Large manufacturers expect the yen to be 108.68 per dollar this fiscal year. The currency was trading at 108.20 as of 11:50 a.m. in Tokyo.
• The jobs-to-applicants ratio also stayed at 1.59 in August, meaning there were 159 jobs available for every 100 applicants.

--With assistance from Tomoko Sato, Yoshiaki Nohara and Emi Urabe.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Jason Clenfield, Paul Jackson

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