Yen weakness brings cheer to big firms
Sentiment among Japanese manufacturers also turns positive for the quarter amid the recovery despite recent market turbulence
Japanese manufacturers’ sentiment turned positive in the three months to June for the first time in nearly two years, a closely-watched central bank survey showed, a sign the recent market turbulence has yet to hurt the feel-good mood created by the government’s reflationary policies.
Robust private consumption also lifted service-sector sentiment, boding well for the Bank of Japan’s plan to end 15 years of grinding deflation and achieve its 2 per cent inflation target in two years through aggressive monetary stimulus.
The headline index for big manufacturers’ sentiment improved 12 points from three months ago to plus 4, slightly better than a median market forecast of plus 3 and the highest level since March 2011, the BOJ’s quarterly “tankan” survey showed on Monday.
That was the second straight quarter of improvement and the first positive reading - which means optimists outnumbered pessimists - since the survey of September 2011, a vindication of Prime Minister Shinzo Abe’s “Abenomics” policy of aggressive monetary stimulus and fiscal spending.
Service-sector sentiment also brightened with the index for big non-manufacturing companies rising 6 points to plus 12, a tad higher than a median market forecast of plus 11.
The upbeat results heighten the chance the central bank will hold off on additional monetary easing in coming months and consider revising up its assessment of the economy at next week’s rate review, analysts say.
“The improvement in big firms’ sentiment was largely driven by yen weakness, which supported exports, and the recovering economy overall,” said Taro Saito, senior economist at NLI Research Institute in Tokyo.
“The BOJ probably doesn’t need to act immediately.”
The survey was compiled amid acute volatility that drove up bond yields and wiped out the gains in Tokyo shares made on investors’ big hopes for Abe’s stimulus plans.
But big manufacturers expect business conditions to improve further three months ahead, suggesting they see the negative effect of recent market turbulence on the economy as limited - at least for now.
Big firms plan to increase capital expenditure by 5.5 per cent in the current business year from April, more than a median market forecast of a 2.9 per cent increase, suggesting the positive mood is finally prompting companies - long hesitant to spend due to the murky economic outlook - to expand operations.
If so, it would be a welcome development for Abenomics, which relies on the psychological impact of its policies to encourage households and companies to spend more.
The yen’s drop against the dollar played a large part in brightening sentiment among Japan’s automakers and electronic giants. Big manufacturers now expect the dollar to average 91.20 yen in the current year from April, much higher than the 85.22 yen projected three months ago.
The new projection is still lower than current dollar/yen levels of around 99 yen, suggesting that exporters will enjoy further gains in profits if exchange-rates stay not far from recent levels.
Financial markets have rallied strongly since Abe first highlighted his brand of aggressive policymaking late last year. They got a further boost in April, when the BOJ unleashed an intense burst of stimulus by pledging to double the supply of money in two years.
But the positive market sentiment turned around in late May when the BOJ’s huge asset purchases disrupted the bond market and drove up yields which, coupled with expectations of the US Federal Reserve’s tapering of monetary stimulus, hit global stocks and triggered a rebound in the safe-haven yen.
Still, the tankan, a key touchstone for BOJ policymakers, reinforced the view that Japan’s economy remains on track for a steady recovery backed by a pickup in exports and private consumption.
The tankan’s sentiment indexes are derived by subtracting the percentage of respondents who say conditions are poor from those who say they are good. Nearly 70 per cent of the companies that replied did so by June 11, the central bank said.