Japan’s largest companies have mixed views on the economic outlook

(Bloomberg) – Japan’s biggest firms have mixed views on the state of the economy as clouds gather over global growth, while open borders and eased restrictions bring new opportunities at home.

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A confidence index among the country’s top manufacturers fell to 7 from 8 in December, while readings for large service firms and construction firms rose, according to the Bank of Japan’s quarterly Tankan report released on Wednesday. Both results were stronger than economists had expected. A positive number means there are more optimists than pessimists.

The fourth consecutive quarterly decline for manufacturers was largely led by producers of oil and coal products, but improvement in a number of other sectors suggested corporate pessimism was not deepening across sectors.

Non-manufacturers, on the other hand, were much more positive given Japan’s reopening to international visitors and the improved outlook for virus cases after the summer’s spike. The confidence index improved from 14 to 19.

“Manufacturers, particularly the auto sector, are cautious about the risks of a slowdown in the US and Europe,” said Nobuyasu Atago, chief economist at Ichiyoshi Securities and a former BOJ official. “On the other hand, non-manufacturers are getting a boost from the end of Covid restrictions.”

Sentiment among personal and hospitality providers improved significantly due to the improved home environment. Sentiment among major hotels and restaurants turned neutral after 11 quarters of deep pessimism during the pandemic. Japan’s borders have been closed to tourists for more than two years.

Active corporate investment, driven by the weaker currency and pent-up demand, are other positive factors. The yen’s collapse has helped exporters boost profitability and made room for more investment. The government also booked 7 trillion yen ($51.2 billion) in its latest additional budget to encourage companies to spend more, particularly on digital and decarbonization.

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A separate report showed that the country’s October machinery orders surged 5.4% mom, also suggesting robust capital investment in the current quarter.

What Bloomberg Economics Says…

“Weaker external demand has likely weighed on manufacturers. Nationwide travel subsidies and relaxed border restrictions on inbound travelers may have supported the service industry.”

— Yuki Masujima, economist

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Still, softening sentiment for commodity producers suggests Japanese manufacturers remain wary of a possible global economic slowdown. After the Federal Reserve’s rapid monetary tightening, a growing number of economists are saying the US is likely to experience a recession next year.

Uncertainty remains over China’s virus policy, although restrictions have finally begun to be eased. Data earlier this month showed that Japan’s factory production fell more than analysts had estimated in October, likely due in part to weaker demand from the world’s second largest economy.

The accelerating price increases also remain worrying. Japan’s inflation hit a four-decade high in October, while real wages fell for the seventh straight month.

Prime Minister Fumio Kishida’s government is aiming to protect consumers from the damage of accelerating inflation with its latest stimulus measures. The package, worth 39 trillion yen ($288 billion) in fiscal spending, includes anti-inflation measures and various aids for businesses to keep growing amid mounting uncertainty.

The Tankan showed that Japanese companies expect an exchange rate of 130.75 yen to the dollar this fiscal year, compared to 125.71 in the previous survey. The yen has appreciated in recent weeks and received a further boost overnight after weaker than expected US inflation data raised the possibility of a pause in the Fed’s rate hikes.

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The BOJ will consider the Tankan outcome at its upcoming policy meeting, scheduled for December 19-20.

“There is continued concern in the manufacturing sector about a downturn due to the global economic slowdown,” said Mitsubishi UFJ Research & Consulting Shumpei Fujita. “The BOJ will not stop monetary easing here, but will continue to address future risks with monetary policy.”

(Updates with more details from publication, comments from economists)

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