Japan’s Manufacturers Lost Optimism Before Stimulus Unveiled

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Japan’s large manufacturers were losing optimism for the first time in more than six years as the government mulled measures to prop up the economy, according to a survey released by the Bank of Japan ahead of its meeting next week.

Sentiment among Japan’s biggest product makers slid to 0 from 5, according to the quarterly Tankan survey released Friday. Economists forecast a reading of 3. Confidence has now weakened for four consecutive quarters, with the drop to zero indicating there are now as many pessimists as optimists.

The results of the survey, which are mainly from the last half of November, reveal the depth of concern among large manufacturers at that time about business conditions amid an uncertain global outlook and the fallout from October’s sale tax hike and a destructive typhoon.

But the report also contained some positives. Sentiment at large companies outside the factory sector held up better than expected and capital spending plans actually edged up from the previous quarter.

Japan’s Manufacturers Lost Optimism Before Stimulus Unveiled

Key Insights

  • “The results show companies are cautious about the impact of the tax hike,” said Hiroshi Miyazaki, a senior economist at Mitsubishi UFJ Morgan Stanley, noting larger-than-expected falls in recent consumption data. The U.S.-China trade negotiations were also compounding their outlook, he added.
  • Still, resilience in the service sector suggests the damage from the global slowdown is still largely contained to Japan’s manufacturers. The service industry has been a key prop for overall growth in the economy this year.
  • Longer term, there are reasons for optimism. Along with signs of progress in U.S.-China trade talks, the stimulus package launched last week by the Abe administration has raised Japan’s growth prospects for next year, even if the situation in the current quarter remains challenging.
  • Economists surveyed by Bloomberg forecast the economy will shrink by an annualized 2.6% this quarter, as the higher sales tax crimps consumer spending and production contends with a continued global slowdown and October’s super typhoon.
  • Around 70% of businesses had responded to the survey by Nov. 27, according to the BOJ, long before the government’s announcement of the 13.2 trillion yen ($122 billion) of fiscal stimulus, though it was known a package was in the pipeline.
  • “Capital spending remains strong and that means the BOJ can still stick to its view for a moderate recovery,” said economist Hideo Kumano at Dai-ichi Life Research Institute. “It’s likely that the BOJ will stand pat next week.”

What Bloomberg’s Economists Say...

“Our view is that business activity is likely to slow. The sales-tax hike has piled more pressure on companies, and a contraction in the economy looks certain in 4Q. It’s not clear how strong the bounce will be in 1Q next year. Our recession probability model is signaling bigger risks. Further out, though, fiscal stimulus should help to prop up the economy..”

--Yuki Masujima, economist

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  • Businesses said they plan to increase spending by 6.8%, an uptick from a quarter ago when they forecast a 6.6% increase. Economists had expected the number to drop to 6%.
  • Sentiment among large service businesses dipped to 20 from 21. The forecast was for a drop to 16.
  • An index that measures large manufacturers’ outlook registered 0, worse than analysts’ forecast of 3.
  • Large manufacturers expect the yen to be 107.83 per dollar this fiscal year. The currency was trading around 109.40 early Friday in Tokyo.

©2019 Bloomberg L.P.

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