Manufacturers Becoming Less Optimistic as Yen's Advance Threatens Profits
Japan’s largest manufacturers are becoming less optimistic about business conditions toward the end of the year as the yen’s advance threatens profits.
The same percentage of big manufacturers reported they are pessimistic about the fourth quarter as those saying they are optimistic, resulting in an index reading of zero, a government report showed in Tokyo today. For the three months to September the figure rose for the fifth quarter in a row, to 13.3 points from 10.
The recovery in earnings of exporters such as Toyota Motor Corp. and Honda Motor Co. is looking more fragile as signs of cooler global growth push up the yen’s exchange rate. Bank of Japan Governor Masaaki Shirakawa said this week he is “well aware” that the stronger currency is affecting exports and indicated that policy makers are ready to implement further stimulus if needed.
“The outlook figure signals that business confidence will deteriorate clearly, given concern over slowing global growth and the yen’s gain,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “Japan’s economy will likely stay afloat as long as corporate profits hold out, but a decline in sentiment threatens to shrink business activities.”
Today’s report, conducted jointly by the Cabinet Office and Ministry of Finance, offers a hint of the outcome of the Bank of Japan’s Tankan survey, the nation’s most closely watched gauge of corporate confidence, due Sept. 29.
Tankan Survey
The Tankan survey may also show more optimism this quarter and a gloomier outlook, RBS’s Nishioka said. The Tankan measures the overall level of sentiment while today’s survey examines the degree of change in business conditions from the previous quarter. Large manufacturers are those with more than 1 billion yen ($12 million) in capital.
Business confidence increased this quarter as an unusually hot summer and last-minutes purchases of cars before the expiration of the government’s subsidy program boosted consumer spending. Sentiment among all large industries was 7.1 points this quarter, rising from 4 points three months ago, today’s report showed.
A stronger yen reduces earnings made abroad when repatriated into local currency. Every one-yen increase against the dollar reduces Toyota Motor’s annual operating profit by 30 billion yen and by 16 billion yen at Honda, the companies say.
Shift Production
The Renault SA-Nissan Motor Co. alliance is among manufacturers choosing to shift production overseas in response to the appreciating yen. Chief Executive Officer Carlos Ghosn said last month that the alliance will produce more in South Korea and reduce its reliance on Japan.
Increasing uncertainty risks cutting short the country’s rebound as firms hold back on their investment and hiring plans, according to economist Yoshimasa Maruyama.
“Without more employment and capital spending, the rebound can’t sustain itself,” Maruyama, a senior economist in Tokyo at Itochu Corp., said before the report in Tokyo. “If the yen keeps strengthening like this, it’s possible that exports will stumble, in which case Japan could slump back into a recession.”
The Bank of Japan last week bolstered a credit program and Prime Minister Naoto Kan pledged fresh stimulus to help protect the economy. Shirakawa said on Sept. 7 that the bank will take policy action “in a timely and appropriate manner if determined necessary.”
Revise Estimate
Economists predict the government will likely revise up its estimate of the second-quarter economic growth to be released tomorrow, after a report last week showed that companies cut spending at the slowest pace since 2007.
Gross domestic product expanded 1.5 percent on an annualized basis last quarter, compared with a preliminary reading of 0.4 percent, according to the median forecast of 21 economists surveyed by Bloomberg News.
Companies said they plan to increase spending on plant and equipment by 8.7 percent this fiscal year, today’s survey showed.
Today’s report also showed the labor market may be improving. The employment index rose to 0.3 points, climbing above zero for the first time in seven quarters. A positive reading means companies that have a shortage of workers outnumber those with too many staff.
To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net
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