Japan Corporate Sentiment Gains Seen Short-Lived as Tax Rises

Sentiment among large Japanese manufacturers rose to the highest level since 2007, a gain that may be short-lived as today’s sales-tax increase weighs on consumption and confidence.

The Tankan index was at 17 in March, climbing from 16 in December, a Bank of Japan report showed today, below the median estimate of 19 in a Bloomberg News survey of economists. The index is forecast to drop to 8 in June, worse than economists’ forecast of 13.

The survey showed big companies plan to boost investment 0.1 percent in the year starting today, less than an estimated increase of 3.9 percent in the previous fiscal year. The lack of support from private-sector demand could add to pressure on the central bank to boost unprecedented easing to support the world’s third-biggest economy.

“There isn’t much reason for companies to be optimistic,” said Shinichiro Kobayashi, a senior economist at Mitsubishi UFJ Research and Consulting Co. “The sales-tax hike is going to drag on the economy, and exports have been weaker than expected on the back of a slow global recovery.”

The BOJ, which holds its next policy meeting April 7-8, could boost monetary stimulus as early as June, said Kobayashi.

Lower Outlook

Shares swung between gains and losses as investors weighed a weaker yen against the Tankan data. The Topix index of stocks was up 0.1 percent at 1:36 p.m. in Tokyo, while the yen fell 0.1 percent against the dollar to 103.30.

Today’s data shows that Abenomics is helping the economy improve, Finance Minister Taro Aso said today. The next few months will be key in whether the government increases the sales levy to 10 percent as planned, he said. Abe will make a decision after examining data in December, said Economy Minister Akira Amari.

Confidence among large non-manufacturers rose to 24 from 20 in December, in line with projections. The index is forecast to fall to 13 in June, today’s data showed.

Large firms see profits falling 2.3 percent in the fiscal year starting today after a forecast 28 percent jump in the year ended yesterday.

Big companies across all industries plan, on average, to increase capital expenditure 9.9 percent in the first half of the fiscal year before slashing spending by 7.2 percent in the second half, resulting in a 0.1 percent rise for the full year.

Spending Caution

Panasonic Corp. plans to invest 1 trillion yen ($9.7 billion) over the next 5 years, the Nikkei newspaper reported yesterday, signaling little change in its spending plans. The company’s expenditures in the year ended yesterday are estimated at 220 billion yen, according to the average of nine analysts surveyed by Bloomberg.

“Earnings projections aren’t very strong so it’s natural for companies to remain cautious,” said Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute in Tokyo. “Companies are cautious about committing to capital spending.”

Sentiment for large companies in the lumber and wood sector is projected to slump to 5 in June from 74, the highest level since February 1990, as demand for housing is likely to drop off after the tax increase. Confidence among big firms in the auto industry is expected to plunge to minus 2 from plus 36.

Lending Stance

The Tankan showed banks were more willing to lend money, with medium-sized companies reporting that lending attitudes were the best since June 1997.

“Financial institutions have the money to lend but not so many places they can lend to,” Kumano said. “Their lending stance is just a back-up as companies are cautious about spending and not so keen to borrow right now.”

Etsuro Honda and Koichi Hamada, economic advisers to Abe, said last month that May will be a critical time for the Bank of Japan to decide whether additional easing is necessary.

Governor Haruhiko Kuroda has said Japan can ride out the impact of the tax increase to 8 percent and avoid a repeat of the recession after the tax was last raised in 1997.

Thirty-eight percent of economists forecast the BOJ will add to monetary easing by the end of June and 73 percent see it by the end of September, according to a Bloomberg News survey last month.

Consumers unexpectedly cut spending in February, data last week showed, with Aso saying this was a problem, and promising the government will speed up the deployment of government cash in this year’s budget.

Even so, the higher levy will cut into consumers’ purchasing power as wage increases lag behind price gains. The Bank of Japan estimates that the tax increase will add about 2 percent to prices in May.

Base wages, which exclude overtime and bonuses, fell in February for the 21st straight month.

When combined with underlying core inflation in February, inflation will exceed 3 percent for the first time since 1991. Base wages, which exclude bonuses and overtime, fell for a 20th straight month in January.

The Tankan survey of 10,483 businesses was conducted from Feb. 24 to March 31.

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