Japan big manufacturers' mood slumps to near 3-year low

An engineer makes an arm rail for residential buildings inside a metal processing factory in Tokyo, Japan, on March 22, 2016.
An engineer makes an arm rail for residential buildings inside a metal processing factory in Tokyo, Japan, on March 22, 2016. PHOTO: REUTERS

TOKYO (BLOOMBERG) - Sentiment among Japan's large manufacturers deteriorated to the lowest level since mid-2013 as a stronger yen posed risks to company profits, undermining efforts to spur recovery in the world's third-largest economy.

The Tankan index of confidence among large manufacturers stood at 6 in March, the Bank of Japan said on Friday (April 1), declining from 12 three months ago. A positive number means there are more optimists than pessimists among manufacturers. Economists had forecast 8 in a Bloomberg survey.

The drop in sentiment from large employers suggests business investment and wage growth will remain tepid, underscoring the challenges faced by BOJ Governor Haruhiko Kurodaand Prime Minister Shinzo. Mr Abe is front-loading budget spending while Kuroda has added a negative rate to his monetary policy arsenal.

"Companies have plenty of reasons to be discouraged from yen gains, a weak global economy and sluggish consumer spending at home," Hiroshi Hanada, the head of economic research at Sumitomo Mitsui Trust Bank, said before Friday's report was released. "That means Kuroda will stay under a lot of pressure for more action."

Confidence among large non-manufacturers fell 22 from 25 in December, according to the report. Japan's big companies across all industries plan to pare capital spending by 0.9 percent for the year starting in April.

Large manufacturers based their plans on an assumption that the yen will average 117.46 per US dollar in the year after the currency strengthened 6.9 per cent against the dollar this year. A strong yen raises the cost of imported goods and reduces revenue from abroad. The yen traded at 112.51 at 8:56 am in Tokyo.

Manufacturers are starting to react. Toyota Motor Corp., Japan's biggest company, decided to pare a monthly base salary increase to 1,500 yen ($13) this year from 4,000 yen as company president Akio Toyoda said "the tide has turned." Panasonic Corp. and Hitachi Ltd. also are lowering profit forecasts and reducing the amount of base salary increases for their workers.

These moves come despite separate data from the BOJ that show Japanese companies and households had record amounts of cash on hand at the end of December.

Japan's capital spending remains 40 per cent below its peak in 2007 and the index of real wages last year fell to the lowest level at least since 1990, according to government reports.

Barclays Plc projects Japan's annualized gross domestic product will have shrunk 0.1 per cent for the January-March quarter after it contracted 1.1 per cent in the final three months of 2015. Kyohei Morita, Barclays' chief economist for Japan, expects the BOJ will expand monetary stimulus in July though says there is a possibility of further easing in April.

Mr Abe is considering another economic stimulus package ahead of elections this summer, public broadcaster NHK reported Wednesday. Kuroda has said it may take some time to see the impact of the negative rate policy adopted in January but that it will end up helping boost the economy and prices.

"I keep saying that Japan's recovery will pick up the pace gradually but I have to say I'm starting to doubt it as uncertainties mount for companies and households," Mr Hanada said. "It's getting harder to find a bright spot."