Weak yen brightens Japanese manufacturers’ outlook

  • Japanese industry is growing steadily more confident as a weak yen and a stronger global economy offer new hope of escaping deflation.

    The Bank of Japan’s Tankan index for large manufacturers, the country’s most closely watched measure of business conditions, rose from +8 to +10 in March — its highest for 18 months.

  • The figure suggests big companies are starting to believe the yen’s fall is durable and will lead to rising exports, prices and investment in Japan.
  • But confidence remains lower than levels recorded during the early days of Abenomics in 2013, highlighting the long road still ahead for Japan to escape from more than two decades of on-and-off deflation.
  • Business confidence has improved in Japan since the election of Donald Trump as US president last November, triggering a fall in the yen from close to ¥100 against the dollar to a new range of ¥110-¥115.
  • The Tankan is a quarterly survey, similar to ISM polls of purchasing managers in the US. It samples more than 10,000 companies with a response rate of nearly 100 per cent. Compilers subtract the percentage of respondents reporting bad business conditions from those reporting good to give indices ranging from -100 to +100.
  • Japan’s unreliable statistics on consumption and output, which are prone to large revisions, mean the BoJ relies heavily on the Tankan to track the business cycle.
  • Sentiment rose most strongly in Japan’s core export industries. The index for general machinery rose by 11 points to +25, for production machinery by seven points to +17, and for motor vehicles by eight points to +18. That was partially offset by drops in commodity sectors, notably a 16-point fall for the petroleum industry to +6, reflecting a fresh slide in the global oil price. Sentiment in the services sector rose by 2 points to a reading of +20. There was an 8 point rise to +17 for hotels and restaurants, possibly hinting at a pick-up in consumer spending, but a 13-point drop to +31 for communications, as the government puts pressure on mobile phone companies over tariffs. The index for all companies rose by 3 points to +10.
  • With the unemployment rate down to 2.8 per cent, companies reported increasingly severe labour shortages, especially for smaller employers in the service sector. The index for companies reporting they have adequate staff dropped by 4 points to -25.
  • The BoJ hopes that an increasingly tight labour market will lead to upward pressure on wage, feeding through to consumer prices. That in turn would help inflation escape from its current levels close to zero.
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