Japan Tankan Shows Limits on Spending as Companies Cautious

Large Japanese businesses pared their projections for capital spending this fiscal year, signaling challenges for Abenomics as a sales-tax increase looms in April.

Big companies plan to boost spending by 4.6 percent in the year ending March 2014, a quarterly Bank of Japan report showed today. That compared with a 5.1 percent projection three months earlier. The slide contrasted with an increase in sentiment to the highest since 2007.

Prime Minister Shinzo Abe is trying to convince businesses to raise wages and investment as part of efforts to catapult the nation out of a 15-year deflationary malaise. While the yen’s slide to a five year-low against the dollar last week highlighted the boost to exporters from Abenomics, companies aren’t convinced the nation’s recovery will be sustained.

“We still don’t find any evidence that corporates are really starting to get confident about the sustainability of the recovery and actually ramping up domestic investment,” Izumi Devalier, a Japan economist at HSBC Holdings Plc in Hong Kong, told Bloomberg Television. “And that remains a worry in an environment where consumption is going to weaken next year.”

The Tankan index for sentiment among large manufacturers was at 16 in December, up from from 12 in September and beating the median estimate of 15 in a Bloomberg News survey.

Chief Cabinet Secretary Yoshihide Suga said today the survey greatly exceeded expectations and the government will pursue economic policies with confidence.

Central Bank

The Bank of Japan’s board will not add to the unprecedented easing unleashed in April in its drive for 2 percent inflation, according to all 35 economists in a separate Bloomberg News survey.

Today’s Tankan report shows that more large companies forecast input prices rising than falling in the first three months of 2014. Output prices are seen as declining, indicating that firms lack confidence in passing on costs.

The central bank said today that it will include company price forecasts from the next Tankan survey in March.

The businesses’ inflation outlook is a source of concern, said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. “Input prices have to be passed on to output costs to ride out the effects of the sales-tax rise,” he said.

Pessimistic Outlook

Firms are more pessimistic in their outlooks for next quarter. The Tankan was conducted from Nov. 14 to Dec. 13 and surveyed 10,509 businesses.

The yen gained 0.4 percent to 102.85 against the dollar at 2:11 p.m. in Tokyo, after falling last week to as low as 103.92, the weakest since October 2008. The Topix stock index fell 0.9 percent as investors awaited a two-day Federal Reserve policy meeting starting tomorrow.

Large companies plan to increase investment by 8.2 percent in the six months through March from a year earlier, after capital spending was unchanged in the first half of the fiscal year.

The Tankan sentiment index for small non-manufacturers turned positive for the first time since 1992, rising to 4, with construction companies the most optimistic. The gauge for small manufacturers was 1, the first positive result since Dec. 2007.

The improvement among small firms, which also revised up their capital spending projections, suggests the recovery has broadened faster than expected, Masamichi Adachi, a senior economist at JPMorgan in Tokyo, said in a research report.

Wages Push

Abe also needs companies to raise wages if Abenomics is to succeed, and has called four meetings since September with union and business leaders to try to persuade them to do so.

“We respect his request,” Honda Motor Co. Executive Vice President Tetsuo Iwamura said in an interview on Dec. 12. “Our first priority is to improve profitability. Then we will consider the reward for our stakeholders and our associates.”

Salaries excluding overtime and bonuses fell for a 17th straight month in October after a 1.5 percent decline in the decade through 2012.

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