Photographer: Luke Sharrett/Bloomberg

Japan Inc.'s Confidence Is Waning as Headwinds Hit Abenomics

  • Rising signs Japan fell into recession as output disappoints
  • Falling confidence, output may add to calls for stimulus

Weakness in the Japanese economy and the slowdown in Asia are chipping away at the nation’s business confidence, with the latest survey from the central bank showing sentiment among large manufacturers worsening. 

The Tankan index for large manufacturers fell to 12 in September from 15 in June, the Bank of Japan said Thursday, lower than the median estimate of 13 in a Bloomberg survey of economists. The index is forecast to drop to 10 in December.

There’s growing concern that Japan’s economy may have contracted in the quarter that’s just ended, which would tip the nation into its second recession since Japanese Prime Minister Shinzo Abe took office in 2012. Large companies that have benefited from the weak yen and rising profits under Abe have yet to make a significant commitment to expanding domestic investment.

Both Abe and Bank of Japan Governor Haruhiko Kuroda have said investment and wage growth is needed to keep the economy out of deflation and on a growth path.

“The Tankan results indicate that Japan’s outlook remains grim,” said Yuichi Kodama, an economist at Meiji Yasuda Life Insurance Co. in Tokyo. Kodama, who estimates the economy contracted by an annualized 0.9% last quarter, said large manufacturers are less confident about Japan’s outlook because exports are sluggish with the slowdown in China.

Lackluster Investment

Kuroda this week urged companies to act quickly as wages and capital spending remain “lackluster.” Large companies have reported record profits as the weak yen boosts overseas income, and this is filling up in their coffers instead of being invested in production at home or higher wages.

Large companies in a range of industries plan to increase capital expenditure by 10.9 percent in the fiscal year through March 2016. Despite bullish forecasts by companies, their investment actually dropped 0.9 percent in the second quarter from the first three months of the year, when there was a modest 2.6 percent gain, separate Cabinet Office data show.

Big manufacturers based their plans on an assumption that the yen will average 117.39 per dollar. The currency weakened 0.2 percent to 120.16 at 12:55 p.m. in Tokyo.

While conditions for manufacturing firms declined as a result of fading overseas demand, confidence for non-manufacturing companies remained “robust,” according to Bloomberg economist Yuki Masujima. Large non-manufacturers sentiment rose to 25 from 23, with the construction, real-estate accommodation and restaurant sectors among those showing improvement.

The Topix index of stocks has declined 13 percent since the start of August, amid concern that slower economic growth will begin to hurt profits.

The slowdown in China, Japan’s biggest trading partner, is already taking a toll. Exports to the nation dropped 4.6 percent in August from a year earlier, pulling down growth in overall shipments. The BOJ cut its assessment of exports and production in September, even as it kept monetary policy unchanged.

Ambitious Target

Abe on Sept. 24 pledged to expand the world’s third-largest economy by 20 percent without elaborating on how and by when.

The government will push companies to buoy capital spending, Economy Minister Akira Amari said on Sept. 8, after a report showed the economy shrank by an annualized 1.2 percent from April to June.

Cash and deposits held by Japanese companies rose to a record 243 trillion yen ($2 trillion) in the second quarter, according to a BOJ report on Sept. 17. During the quarter, companies reported their highest profits in data reaching back to the 1950s, according to a report by the Ministry of Finance.

The government needs to make “business entrepreneurs at home and abroad believe Japan is serious about economic revitalization,” Shigeo Sato, president of the Osaka Chamber of Commerce and Industry said at a conference attended by Kuroda Monday. “I want to see decisive deregulation and structural reforms.”

Twenty-two of 35 economists predicted Kuroda will have to bolster already unprecedented stimulus, with 11 forecasting this will occur Oct. 30 when the bank reviews its inflation outlook, according to a Bloomberg survey conducted Sept. 7-10.

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