Japan's Improving Manufacturer Sentiment Under Threat From Global Slowdown

An improvement in Japan’s manufacturing confidence may be threatened by mounting evidence that the global economic recovery is slowing.

The gain in the Bank of Japan’s quarterly Tankan index to a two-year high was insufficient to stem a five-day losing streak in the Nikkei 225 Stock Average. Equities slid worldwide this week, and data today showed Chinese manufacturing growth cooled.

“We can’t be wild with joy,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “Japan’s economy has already passed the sweetest spot and will likely go into a plateau next year.”

The Tankan index of sentiment climbed 15 points in June to plus 1, the Bank of Japan said in Tokyo today. The positive number, which exceeded all 22 forecasts in a Bloomberg News survey of economists, means optimists outnumber pessimists. The report contrasted with data this week showing higher unemployment, falling household spending and a drop in paychecks.

The Nikkei slumped 2 percent at the close in Tokyo. The gauge has slid 8 percent over the past two weeks amid concern that global growth will be hampered by government spending cuts worldwide to address swelling public debt concerns.

“People can’t easily believe the facts that fundamentals are improving, because they are worried,” said Masaru Hamasaki, chief strategist in Tokyo at Toyota Asset Management Co., which oversees the equivalent of $15 billion.

Photographer: Toshiyuki Aizawa/Bloomberg

Bank of Japan Governor Masaaki Shirakawa sees signs the rebound is starting to spur demand at home, the Tankan improvements are unlikely to signal an end to his policy of keeping interest rates at 0.1 percent, as deflation lingers. Close

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Photographer: Toshiyuki Aizawa/Bloomberg

Bank of Japan Governor Masaaki Shirakawa sees signs the rebound is starting to spur demand at home, the Tankan improvements are unlikely to signal an end to his policy of keeping interest rates at 0.1 percent, as deflation lingers.

Rising Yen

The yen traded at 88.41 per dollar at 10:25 a.m. in London, stronger than the 90.18 forecast for this fiscal year by big manufacturers in today’s survey. It has climbed 6 percent against the dollar in the past three months and 17 percent versus the euro, gains that could erode exporters’ earnings.

Data across the Asia-Pacific region today highlighted the vulnerability of Japan to a weakening of demand from abroad.

China’s manufacturing growth slowed for a second month in June, two purchasing managers’ indexes showed, adding to signs that Japan’s biggest overseas market is cooling. Manufacturing in Australia and Taiwan also eased, and a report later today is forecast to show a moderation in the U.S. as well.

“We can’t expect further stimulus effects globally,” said Susumu Kato, chief economist for Japan in Tokyo at Credit Agricole CIB and CLSA. “It’s looking shaky whether the expansion that began in April 2009 will be extended to 18 to 24 months.”

Capital Spending

The Tankan survey showed that companies plan to increase capital spending as earnings improve following a global trade rebound that spurred the nation’s recovery from its worst postwar recession. Large businesses aim to increase investment 4.4 percent in the year ending March 31, the first gain in three years, and they see profit rising 21.6 percent.

Should companies follow through on the forecasts, increased investment may support the job market.

“Companies are expecting profits to rise with sales,” said Noriaki Matsuoka, an economist at Daiwa Asset Management Co. in Tokyo. “So it’s a little different from before, when the profit gains were coming from firings.”

The Tankan’s labor index for big manufacturers showed the highest demand for employees since December 2008. The unemployment rate rose for a third straight month in May, to 5.2 percent, a government report showed this week.

Nikon Corp., a Tokyo-based camera maker, is among firms anticipating rising earnings. It aims to more than double net income to 65 billion yen ($733 million) in the year to March 2013. The company will boost capital spending to 120 billion yen over three business years, up 9 percent from the preceding plan.

‘We Need China’

“The good news is that investment is coming back --this is a really significant difference from the past two years,” Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo, said on Bloomberg Television. Still, he said that’s not enough to sustain the recovery. “We need overseas demand; we need China.”

Sentiment at service companies also improved, with the large non-manufacturer index climbing nine points to minus 5, the highest level since September 2008. The Tankan was conducted from May 26 to June 30 and surveyed 11,411 businesses.

While Bank of Japan Governor Masaaki Shirakawa sees signs the rebound is starting to spur demand at home, the Tankan improvements are unlikely to signal an end to his policy of keeping interest rates at 0.1 percent, as deflation lingers.

New BOJ board member Yoshihisa Morimoto said the economy has yet to achieve a “full-fledged” recovery and the central bank should keep providing ample funds to the financial system.

Cloudy Outlook

“There are still many risk factors to the Japanese economy at home and abroad, and it’s still difficult to get a clear picture of the outlook,” Morimoto said at a news conference in Tokyo after joining the policy board today.

Prime Minister Naoto Kan, who faces mid-term elections on July 11, last month released plans for boosting economic growth as well as shrinking the budget deficit to contain the world’s biggest public debt. The growth strategy aims to halt the slide in consumer prices next fiscal year and urges the BOJ to “make utmost efforts” to end deflation.

“It will be difficult for the central bank to justify ending the easy monetary policy,” said Soichi Okuda, chief economist at Sumitomo Research Institute in Tokyo. “The government will continue to press the bank” to spur prices.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

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