According to some analysts, the Japanese economy could be headed for a mild recession this year, following the release of a survey showing sentiment among big Japanese manufacturers has sunk to a four-year low.
The Bank of Japan Tankan survey, released yesterday, is seen as further evidence of a worsening economic outlook.
Commentators said there’s a definite push for the central bank to cut rates later in the year: that’s if the feeble Liberal Democratic Party Government can find a way to appoint a permanent Governor for the Bank of Japan.
Economists said that falling optimism has seen the weakest capital spending plans by large firms in six years and they warned there still seems to be an underestimation of the impact of the rising yen, suggesting further profit and capital expenditure downgrades to come.
The quarterly Tankan showed the headline index of big manufacturers’ sentiment fell to plus 11 from plus 19 in the December survey, well below the market’s median forecast of plus 13.
It was the lowest reading since plus 7 in the December quarter survey of 2003.
But unlike economists and those in business, financial markets took the survey in their stride: the stockmarket firmed and the yen traded marginally lower.
The outlook index for the June quarter was plus 7, which suggests big companies expect conditions to worsen over the next three months.
(The index measures the percentage of firms reporting a favourable business environment minus those reporting unfavourable conditions.)
The survey also showed big firms planned to cut capital spending, which has been the driver of Japan’s recent growth, by 1.6% in the fiscal year that started yesterday.
Economists said that was the lowest capital spending reading for a March Tankan since 2002.
The importance of this particular reading is that investment (capital spending) was the major component of Japan’s unexpectedly strong 0.9% growth in the December quarter, compared to the September three months. That gave an annual rate of growth of 3.2%.
But consumer inflation is rising: it hit 1% in February, thanks to rising energy and food prices. Excluding those, consumer prices actually fell, which is another sign of how miserable Japan’s economy has become. Consumer prices have hardly moved for nine years, hence the sluggish rate of growth in retail sales and consumption. Wages have fallen and unemployment hit 3.9%.
The Bank of Japan meets for two days next week but no one expects a change in rates because of the vacuum at the top of the bank caused by the stand off between the ineffectual Fukuda Government and the Opposition in the Upper House.
Possibly the reason for the stockmarket ignoring the widely followed Tankan survey is the fact that the main Nikkei share index has fallen 18% so far this year: from the point of view of investors, the economy is moribund and in recession, it would seem.
The parallels with the US are interesting in that Japanese export growth, like America’s, remains very strong and is the only area of the economy booming. In fact both economies would be basket cases if the export sectors were as sluggish as domestic business is. Yet Japanese exporters are battling the high yen, Americans are riding the tail of the slumping greenback.
Japanese exports are booming into Asia and Europe, and have fallen 6 months in a row to the US, which is the main market. Exports to China are now growing much faster than other major markets.
But Japan’s manufacturers cut production in February for a second month, according to figures out this week.
Output fell 1.2% from January, when it slid a revised 2.2% on December. That was the first back to back fall in output for nine months.
And the Japanese Government’s finances seem to have sprung an unnecessary leak.
Prime Minister Fukuda has warned the revenue leak would create a budgetary crisis because the opposition had forced the withdrawal of a petrol tax, depriving his government of around $US26 billion in revenue, or, as Bloomberg nicely pointed out, 1% of gross domestic product.
The law expired yesterday and it will certainly leave a gaping hole: the budget is $US830 billion.
The parliamentary deadlock, which has blocked renewal of the tax, results from opposition’s control of the upper house. That has already brought the gap at the top of the country’s Central Bank.
Reporters in Tokyo claim it could be resolved by either agreement between the government and the opposition if Mr Fukuda agreed to step down, or call early elections. National polls are due by next year but the prime Minister wants to stay on until the G-8 summit midyear.
The Bank of Japan was forced to inject $US30 billion into the Japanese financial markets on Monday to drive down cash rates which had risen as high as 0.75% (the Bank’s rate is 0.50%) because of an end of financial year funding drought.
The petrol tax is worth 25 yen per litre of petrol (around 25 USc). It would cut the regular petrol tax to 125 yen a litre, or $US1.25.
The rejected tax is a ‘temporary’ tax which needs regular parliamentary renewal. It has been temporary for 30 years, which shows the level of ineffectualness at the highest level in Japan.
