Japan’s Manufacturers’ Sentiment Sags in Challenge for Abe

Confidence of Japan’s large manufacturers declined in the fourth quarter as a recession offset a boost from a weaker yen, underlining the economic challenges facing Prime Minister Shinzo Abe after his election win.

The Tankan’s big manufacturer index slipped to 12 in December from 13 in September, the Bank of Japan said today, lower than the median estimate of 13 in a Bloomberg News survey of economists. The index is forecast to drop to 9 in March.

A recession and an election victory that puts pressure on Abe to deliver on promised growth-boosting reforms are raising the stakes for his efforts to revive the world’s third-biggest economy. Burdened by debt, the government is counting on companies to increase investment and wages to fuel a recovery.

“Companies are still cautious,” said Kiichi Murashima, an economist at Citigroup Inc. “I doubt capital investment will be implemented as planned as companies are still not expecting strong growth in the economy. Implementing policies to boost growth will be an important task for Abe’s government.”

Sentiment among large non-manufacturers rose to 16 from 13. Across all industries, big companies plan to boost capital expenditure by 8.9 percent this fiscal year through March, compared with plans for an 8.6 percent increase in the September survey.

Weaker Currency

Large manufacturers based their plans on the assumption the yen would average 103.36 per dollar in the current fiscal year. The Japanese currency traded at 118.62 against the dollar at 11:28 a.m. in Tokyo, after touching a seven-year low of 121.85 on Dec. 8. The Topix index of shares declined 1.1 percent.

A weaker yen tends to help exporters by raising their competitiveness abroad and increasing the value of profits when repatriated. It also boosts costs for importers and squeezes households and domestically-focused companies.

“Sentiment among companies will improve gradually,” Yoshiki Shinke, an economist at Dai-ichi Life Research Institute, said before the release. “For now, companies are weighing the boost from a weak yen and the stalled recovery.”

Consumption slumped in the wake of the sales-levy increase in April, pushing the economy into two quarters of contraction. Abe last month postponed another tax hike by 18 months to April 2017, prompting rating agencies to cut Japan’s debt rating or warn of possible downgrades.

The government is considering an extra budget worth as much as 3 trillion yen to support the economy, according to people involved in the discussions.

Stimulus Boost

The survey highlighted tough economic circumstances for smaller companies. Small firms across all industries forecast business conditions worsening, with the index seen falling to -4 in March from 0 in December.

At the same time, the Tankan underscored the tight labor market, which BOJ Governor Haruhiko Kuroda has said will lead to higher pay for workers and prompt price increases that will fuel inflation. An index measuring employment conditions across all companies and industries declined to -15 from -14 three months earlier, indicating a bigger shortage of workers.

Wage negotiations between business and labor leaders next spring will be critical to gauging prospects for consumer prices, according to the people familiar with the central bank’s discussions.

Record Stimulus

The BOJ “has been taking ‘action’ and will continue to do so,” Kuroda said in a speech to business leaders on Nov. 25. “I would like to conclude my speech by expressing my expectations for your ‘action’ that looks toward the situation for the economy after overcoming deflation.”

The BOJ bolstered already-record stimulus on Oct. 31. The action helped accelerate the depreciation of the yen and boost Japanese stocks to a seven-year high.

The yen has weakened 28 percent since Abe took office in December 2012 and the Topix has risen about 65 percent.

Aggregate net income at 195 of the largest listed companies in Japan will expand 10 percent to a record 17.5 trillion yen this fiscal year, based on analyst estimates compiled by Bloomberg. Toyota Motor Corp. last month raised its profit forecast to an record 2 trillion yen.

“It’s important to deliver the benefit of economic growth to every level of Japanese people by ensuring a recovery trend,” Sadayuki Sakakibara, the chairman of Keidanren, the country’s biggest business association, said on Dec. 8. “We will work on creating a virtuous economic cycle through increasing employment and raising wages on the back of rising profits.”

Consumer confidence fell for a fourth straight month in November, while households cut spending from year-earlier levels in every month from April through October, according to government data.

The Tankan survey of 10,312 businesses was conducted from Nov. 12 to Dec. 12.

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