Daily Management Review

Japan's Business Climate Is Improving, Signalling A Sustained Economic Rebound


According to a central bank survey, business optimism in Japan increased in the second quarter as raw material prices reached their high and pandemic restrictions were relaxed, indicating the economy was on track for a gradual recovery.
According to the quarterly "tankan" released on Monday, businesses anticipate raising capital spending and project inflation to remain above the Bank of Japan's 2% target over the next five years. These findings give policymakers encouragement that the conditions for gradually winding down their massive monetary stimulus may be taking shape.
"The tankan confirmed our view that Japan's economy is on track for a moderate recovery," said Atsushi Takeda, chief economist at Itochu Economic Research Institute.
"While input prices have declined, output prices continue to rise in a sign companies are being able to pass on costs. That's a good sign for the BOJ's inflation outlook and may prod the bank to tweak its yield control policy later this year."
The headline index tracking the sentiment of major manufacturers reached a two-year high of plus 5 in June, showing that businesses were rebounding from the blow of rising raw material costs and supply interruptions. The headline index had fallen to a two-year low of plus 1 in March.
The reading was the highest since December 2022 and was plus 3 when compared to the median market expectation.
The non-manufacturers' sentiment index increased from plus 20 three months earlier to plus 23 in June, rising for the fifth consecutive quarter and reaching its best level since June 2019.
The poll revealed that the elimination of COVID curbs increased tourism demand, causing an index measuring the mood among hotels and restaurants to reach its best level ever.
As a result of the positive economic outlook, the results assisted in raising the Nikkei share average in Japan.
Large companies anticipate increasing capital spending by 13.4% in the current fiscal year, which ends in March 2024, above the median market expectation of a growth of 10.1%.
According to the study, businesses anticipate the dollar to average 132.43 yen during the current fiscal year that ends in March 2024, a significant decrease from recent values of roughly 144.50 yen.
While exporters' revenues are boosted by the weak yen, retailers and service sector companies that are susceptible to the growing cost of food and energy imports may suffer as a result.
According to the tankan, large manufacturers anticipate an improvement in business conditions three months from now, while non-manufacturers predict a decline due to concerns about rising expenses.
The BOJ, which will provide updated quarterly GDP and inflation predictions following a policy meeting on July 27-28, pays particular attention to a number of data points, including the tankan.
Despite the fact that inflation has been above the target rate of 2% for more than a year, BOJ Governor Kazuo Ueda has frequently emphasised the necessity to maintain ultra-loose monetary policy until wages rise to the point where price increases can be sustained around the target.
According to the tankan, corporate inflation expectations decreased in June compared to three months prior but remained over the BOJ's target level for the next five years.
Inflation is anticipated to reach 2.6% in a year, down from the projected 2.8% in March, and 2.2% in three years, also down from the projected 2.3% in March. In five years, they predict inflation to be 2.1%, the same as the forecast made in March.
Analysts predict that Japan's economy will continue to develop as a post-pandemic uptick in domestic spending offsets export challenges caused by slower global growth. Japan's economy grew by an annualised 2.7% in the first quarter.