Business sentiment up in Japan but outlook clouded by sales-tax rise

Confidence suggests sales tax increase may have less impact on growth than first predicted

PUBLISHED : Friday, 18 April, 2014, 1:17am
UPDATED : Friday, 18 April, 2014, 1:53am

Confidence at Japanese manufacturers grew in April for the first time in three months, and a more moderate dip is seen over the next three months, a Reuters poll showed, suggesting the impact on economic growth from a sales tax increase may be less pronounced than thought.

The monthly Reuters Tankan, which closely correlates with the Bank of Japan's tankan survey, gives an early glimpse of business morale after the tax rate rose to 8 per cent from 5 per cent on April 1. It also showed service-sector sentiment hit a record high.

The reading could support a dominant view among policymakers and private-sector analysts that the world's third-largest economy can weather the pain from the tax rise although manufacturers' and service-sector mood is seen sliding in July.

Compared with previous polls, companies appear slightly less concerned about the sting from the tax rise, citing relatively firm domestic demand and effects of increased public works spending.

"Orders we receive and sales grew in the March quarter, probably due to the last-minute demand. We need to wait and see how they fare in April-June before determining whether the trend is looking up," an electric machinery firm said in the survey. "We guess our business is looking up as a trend because orders unrelated to the last-minute demand are also rising."

A total of 253 firms responded to the poll of 400 big and medium-sized firms taken April 2-14. Indices are calculated by subtracting the percentage of pessimistic responses from optimistic ones.

The poll comes as a recent slew of soft data kept alive market expectations for fresh stimulus by the Bank of Japan in the summer, even though the central bank has repeatedly dismissed the need for more near-term action, arguing that the economy is on track to meet its inflation goal.

Governor Haruhiko Kuroda reiterated that the economy will resume growth above its potential after weakening in the April-June quarter, while Finance Minister Taro Aso saw pullback in demand after April 1 was smaller than expected.

Still, the uncertain outlook is keeping firms cautious amid a margin squeeze from high import costs of fuel and raw materials due to a weak yen. While the weak yen generally helps exports, companies voiced concern about lacklustre demand from China and elsewhere in Asia, and a fallout from the Ukraine crisis on external demand.

"The last-minute demand before the sales tax hike has slowed since March and we are concerned that a slump in private consumption may drag down business conditions from now on," a transport firm said in the Reuters Tankan.

"The US economy is becoming relatively steady, but that has not led to a recovery in real demand as the Chinese economy remains sluggish and tension in the situation surrounding Russia (and Ukraine) is a concern that could hurt business sentiment."