Abe Set to Face Manufacturing Gloom as Japan Contracts: Economy

When Shinzo Abe was prime minister in 2007, optimism among Japanese manufacturers such as Sony Corp. (6758) was near a 16-year high.

Now, as polls suggest Abe’s party will retake power in elections on Dec. 16, the Bank of Japan’s Tankan survey will probably show tomorrow that large manufacturers are the most pessimistic since the aftermath of the global recession. Sony hasn’t made a net profit in four years.

Worsening sentiment may heighten pressure on Abe to deliver on promises for more fiscal and monetary stimulus even as he’s constrained by the world’s largest public debt. Honda Motor Co. (7267) and Nissan Motor Co. (7201) cut their profit forecasts by a fifth after Japan’s territorial dispute with China dragged down sales, while the government is poised to bail out chipmaker Renesas Electronics Corp. (6723)

“Abe’s intentions are very clear. He wants to weaken the yen, push up stock prices and improve sentiment,” said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. and a former central bank official. “It remains to be seen whether his policies will work.”

Kanno expects the BOJ to add to monetary stimulus at its meeting next week.

One of the central bank’s new tools is a planned program of unlimited lending to banks. Policy makers aim to limit restrictions on where money ultimately flows from that initiative, meaning cash could go to companies including hedge funds, people familiar with the central bank’s discussions said.

Photographer: Kiyoshi Ota/Bloomberg

The economy shrank in the last two quarters, meeting the textbook definition of a recession. Close

The economy shrank in the last two quarters, meeting the textbook definition of a recession.

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Photographer: Kiyoshi Ota/Bloomberg

The economy shrank in the last two quarters, meeting the textbook definition of a recession.

Yen Weakens

The yen fell 0.5 percent to 83.65 per dollar as of 3:02 p.m. in Tokyo, its lowest since March, after the U.S. Federal Open Market Committee yesterday expanded its asset-purchase program and said rates will stay low as long as unemployment remains above 6.5 percent and inflation is in check.

The Nikkei 225 Stock Average closed 1.7 percent higher, heading for its fifth week of gains.

While the yen has fallen around 5 percent against the dollar in the past month, it’s still stronger than the 100 yen per dollar that Nissan Chief Executive Carlos Ghosn said is the currency’s “neutral range.”

The BOJ’s quarterly Tankan index for large manufacturers probably fell to minus 10 in December, from minus 3 in September, according to the median estimate of 25 economists surveyed by Bloomberg News. That would be the lowest since the first quarter of 2010. A negative figure means pessimists outnumber optimists.

China Dispute

The economy shrank in the last two quarters, meeting the textbook definition of a recession, as the dispute with China, the country’s biggest export market, caused consumers there to shun Japanese products and contributed to Japan’s worst year for exports since the global recession in 2009. Economists surveyed by Bloomberg News expect another contraction this quarter.

Toyota Motor Corp. (7203)’s sales in China fell 22 percent from a year earlier in November, after a 44 percent drop in October and a 49 percent decline in September, the biggest monthly drop in a decade.

Companies in the Nikkei that reported earnings in the July- September period showed an aggregate 26 percent on-year decline in net income, according to data compiled by Bloomberg.

Sony, Panasonic Corp. (6752) and Sharp Corp. (6753) have announced a total of more than 29,800 job cuts for the year ending March 31 as they try to recover from 1.6 trillion yen ($19.1 billion) in combined net losses last fiscal year.

Monetary Easing

“Poor Tankan numbers would give the BOJ a good excuse to ease monetary policy again next week,” said JPMorgan’s Kanno, who forecasts a 10 trillion yen increase in the bank’s asset- purchase program at the meeting on Dec. 19-20. “The BOJ will also face more pressure from politicians and the market to weaken the yen.”

The central bank has failed to come close to its 1 percent inflation goal as consumer prices have not risen since April. Abe has called for an inflation target of 2 percent and unlimited monetary expansion.

“Mr. Abe is playing a dangerous game,” Richard Koo, chief economist at the Nomura Research Institute, said in a research note on Dec. 11. “A sharp increase in government bond yields could lead to fiscal collapse in countries with a large national debt. For Japan, where the national debt amounts to 240% of GDP, the results would be catastrophic.”

Elsewhere in Asia today, South Korea held borrowing costs before next week’s presidential election and after North Korea launched a rocket yesterday in defiance of international sanctions.

The Philippines will announce an interest-rate decision. In Europe, Italy is due to release inflation data.

U.S. Economy

In the U.S., the latest readings on the health of the world’s biggest economy will come from numbers for retail sales, producer prices and initial jobless claims, along with the Bloomberg Consumer Comfort Index.

Abe, 58, may get a helping hand in his efforts to boost corporate sentiment from signs of recovery in the U.S., Japan’s second-biggest export market.

The Topix Index (TPX) will rise 14 percent in the next six months as automakers lead gains on the back of a stronger global economy and more aggressive monetary easing in Japan, Kathy Matsui, chief Japan strategist at Goldman Sachs Group Inc. said in a Dec. 5 interview.

Japan’s machinery orders, an indicator of capital spending, rose for the first time in three months in October while factory output rose the most this year.

“The U.S. and China seem to be recovering and that could help to improve corporate sentiment,” said Takuji Okubo, chief economist at Japan Macro Advisors, formerly of Goldman Sachs and Societe Generale SA. “But companies still have plenty of reasons to be cautious as the yen remains strong and an increase in external demand has yet to materialize.”

To contact the reporters on this story: Andrew Joyce in Tokyo at ajoyce8@bloomberg.net; Andy Sharp in Tokyo at asharp5@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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