Japan’s Biggest Firms Take Different Views on Economic Outlook

(Bloomberg) — Japan’s biggest companies are taking mixed views on the state of the economy as clouds gather over global growth as opened borders and relaxed restrictions offer new housing opportunities.

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

The fourth consecutive quarterly fall for manufacturers was largely led by those who make oil and coal products, but growth in other sectors suggested that pessimism among companies had not deepened. all sectors.

Non-manufacturing on the other hand took a more positive outlook amid Japan’s reopening to international visitors and an improved outlook on virus cases after a summer surge. The confidence index increased to 19 from 14.

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

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Reflecting the improved home environment, the status of personal services and hospitality providers has improved significantly. Sentiment at 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 softer currency and pent-up demand are other positive factors. The depreciation of the yen has helped exporters increase their profits and created room for more investment. The government also booked 7 trillion yen ($51.2 billion) in the latest supplementary budget to encourage companies to spend more, especially on digitalization and decarbonization.

A separate report showed that domestic engine orders rose 5.4% in October from the previous month, also pointing to strong capital investment in the current quarter.

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“Weaker external demand is likely to weigh on manufacturers. Nationwide travel subsidies and relaxed border restrictions for travelers are likely to support the service industry.”

— Yuki Masujima, economist

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However, declining sentiment for commodity producers suggests that Japanese manufacturers remain alert for a possible global economic slowdown. After the rapid tightening of monetary policy by the Federal Reserve, many economists say that the US is likely to have a recession next year.

Uncertainty continues to hang over China’s virus-related policies, although it has finally begun a relaxation of restrictions. Data earlier this month showed that factory production in Japan fell more than analysts had estimated in October, likely due in part to weaker demand from the world’s second-largest economy.

Accelerating price inflation also remains a concern. Inflation in Japan hit a four-decade high in October, while real wages fell for the seventh straight month.

The administration of Prime Minister Fumio Kishida aims to protect consumers from the damage of rapid inflation through the latest measures to stimulate the economy. The package, worth 39 trillion yen ($288 billion) in fiscal spending, includes anti-inflationary measures and various aids for businesses to continue growing amid rising uncertainty.

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The Tankan showed that Japanese companies expect the exchange rate to be 130.75 yen against the dollar this fiscal year, compared to 125.71 in the previous survey. The yen has made gains in recent weeks, and gained further overnight gains after weaker-than-expected US inflation numbers put the possibility of a pause from gains. in the interest of the Fed to see.

The BOJ will consider the results of the Tankan in the upcoming policy meeting scheduled for December 19-20.

“There is continued concern within the manufacturing industry about a decline 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 monetary policy risks.”

(Updates with additional details from the release, economist comments)

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