Japan’s large manufacturers became less pessimistic as declines in commodity prices aided profitability, boosting the outlook for the world’s third-biggest economy even as a stronger yen crimps exports.
The quarterly Tankan index of sentiment was minus 1 in June from minus 4 in March, the Bank of Japan said today in Tokyo. The median estimate of 19 economists surveyed by Bloomberg News was for a reading of minus 4. A negative number means pessimists outnumber optimists.
Bank of Japan policy makers meeting on July 11 and 12 will weigh whether improved sentiment and progress in tackling Europe’s debt crisis are enough to warrant withholding further stimulus. Today’s report showed large Japanese businesses see their capital spending rising 6.2 percent in the year ending March, up from a previous forecast of no change.
“Today’s data won’t deliver relief to the Bank of Japan,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Co., who correctly forecast the minus 1 reading and predicts the central bank will expand its asset purchases. “It’s increasingly unclear that global demand, which is key for Japan’s economy, can gain traction to lead the recovery.”
The Nikkei 225 Stock Average closed down 0.04 percent in Tokyo, reversing gains posted after the data was released and European leaders reached an agreement on measures to ease the region’s debt crisis.
The gain in the Tankan is “a small improvement,” said Minami. “Lower commodity prices probably helped sentiment inch up but it’s still in negative territory.”
The yen was Asia’s strongest-performing currency against the dollar over the past three months, appreciating about 3 percent and adding to concern that the nation’s recovery will fade as gains from earthquake reconstruction and car purchase subsidies wear off.
“If there was a drastic strengthening of the yen, this would have a negative effect on the Japanese economy as it would depress company profits,” Bank of Japan Deputy Governor Hirohide Yamaguchi said at a conference in Tokyo today.
The currency traded at 79.60 per dollar at 3:47 p.m. in Tokyo. Large manufacturers forecast on average that the yen will trade at 78.95 per dollar in the year through March, according to today’s report.
“Manufacturers are alert to the renewed appreciation of the yen due to Europe’s turmoil, making them cautious about the economic outlook,” Kohei Okazaki, an economist at Nomura Securities Co. in Tokyo, said before the report. “Further monetary easing in July is still in the cards.”
Economic growth may cool to an annualized 1.9 percent in the second and third quarters, and 1.4 percent in the final three months of 2012, according to the average forecast of 40 economists in a Japan Center for Economic Research survey released June 7. That compares with 4.7 percent in January-through-March.
Subsidies for purchases of fuel-efficient cars and the extra money budgeted for reconstruction of devastated northeastern regions have boosted the economy after it contracted last year. Confidence at motor vehicles makers rose to 32 in June, the highest since September 2010, today’s report showed.
Sentiment at service companies improved, with the large non-manufacturer index climbing to 8, the highest since June 2008. Rebuilding demand and the government’s car-subsidy program has fueled consumer spending, with retail sales rising in May.
Japan’s recovery after last year’s earthquake and tsunami could grind to a halt in 2014 when the first increase in the nation’s sales tax may take effect, according to UBS AG and Itochu Corp. Parliament’s lower house last week approved Prime Minister Yoshihiko Noda’s bill to raise the sales tax to 8 percent and then 10 percent in 2015 from 5 percent now.
“The risk of further gains in the yen can’t be dispelled,” said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. “There’s concern that a slowdown in Europe and China will reduce the volume of Japanese exports.”