Japan Manufacturer Sentiment Climbs as Capex Plans Ramp Up

(Bloomberg) -- Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Confidence among Japan's large manufacturers rebounded to the highest since 2018 and big businesses of all stripes ramped up investment plans in a sign that companies see an end to the pandemic even as virus restrictions grind on at home.

Sentiment at Japan's big product makers climbed higher into positive territory and improved for a fourth consecutive quarter, as large firms of all types said they plan to boost investment by nearly 10%, the Bank of Japan's Tankan survey showed Thursday.

While gains among service companies were more muted amid continued restrictions on bars and restaurants to contain the virus, economists said the overall results suggest a stronger recovery for Japan after a weak first half of the year.

“Japan's recovery is going to gain momentum,” said economist Shinichiro Kobayashi at Mitsubishi UFJ Research & Consulting. “Business investment will start to become a driving force for the economy.”

The Tankan continued to show a sharp divide between Japan's service companies and its manufacturers. Exporters are benefiting from a global recovery and weakness in the yen, while consumer-facing businesses have been casualties of the country's drawn out fight against the virus.

What Bloomberg Economics Says...
“The Bank of Japan's latest Tankan suggests the economy is poised for an upswing after a likely recession in the first half. It may be a little weaker than expected, with the improvement in sentiment damped by renewed and extended virus-containment measures.”
Yuki Masujima, economist
To read the full report, click here.

Weak consumer spending is the big reason the economy is seen just barely eking out growth in the three months through June after shrinking in the first quarter.

Still, an index of the mood at large non-manufacturers showed some improvement, edging into positive territory for the first time since March 2020. Pessimism eased among providers of personal services, but hotels and eateries continued to register deeply negative numbers.

“Sentiment among large service companies turned positive earlier than I had expected, but there's a question mark over whether it will keep improving without disruption due to the recent rebound in infection cases,” said economist Mari Iwashita at Daiwa Securities Co.

Goldman Sachs Sees Reasons For Optimism on Japan's Vaccine Drive

Japan's vaccine drive has picked up pace, but infections are rising again and the government is planning to extend virus measures in Tokyo and other areas to coincide with the early days of this month's Olympics, according to local media.

The outlook should brighten once vaccines reach more people and public safety improves. Goldman Sachs Group Inc. estimates half the country will be vaccinated by the end of August.

Among manufacturers, automakers were one of the only sectors to show slipping confidence. Data on factory production this week showed semiconductor shortages may have finally started to hit the industry, with the Toyota group's total domestic down in May by more than 100,000 vehicles from two years earlier, before the pandemic hit.

Toyota, Nissan Global Sales Soar on U.S. Demand, Output Stutters

Although the service sector will need aid as long as restrictions last, overall gains in business confidence are likely to reduce the need for another big government stimulus package. The politics surrounding upcoming elections, however, are likely to trigger some new spending from Prime Minister Yoshihide Suga.

While Thursday's Tankan results may feed into higher growth forecasts from the BOJ later this month they're not likely to change the path of easing for the central bank, which is grappling with persistent price weakness. The bank doesn't see inflation reaching its 2% target anytime before 2024.

“The Tankan suggests there's no need for more stimulus from the BOJ,” said Mitsubishi UFJ's Kobayashi. “Still, the wide gap in confidence between manufacturers and non-manufacturers shows their support is still needed for the economy.”