Confidence levels among the top end of Japanese business is at a four year low as companies forecast lower earnings for the first time in seven years.
At the same time big companies say they will lift capital expenditure 2.4% over the coming financial year (which ends March 31, 2009 in Japan), compared to a forecast three months ago of a decline.
But that was about the only crumb of comfort from the latest quarterly Tankan survey of manufacturer sentiment from the Bank of Japan yesterday.
As with industrial production figures, the Tankan survey is considered to be perhaps the best guide to Japanese business confidence and conditions because of the way manufacturing still dominates the economy, unlike the US and Europe where services are now the main driving sector.
That’s why the 5 points slide in sentiment in June from 11 in March, (the third quarterly decline in a row) was confirmation that the impact of the credit crunch and economic slowdowns in the US and Europe are having a greater impact in Japan than previously estimated. The market forecast had been for a fall of 3 points.
It means pessimists outnumber optimists by a larger amount than in March.
Not even solid exports to Asia (China) and other emerging economies can offset the impact of the sluggish US economy in particular where the sliding car industry is wreaking havoc on the performance of Toyota, Honda, Nissan and their suppliers.
With large companies (of the size of the Toyota, Nippon Steel, Honda etc) forecasting a 7% fall in their earnings for the year to next March, their confidence about the outlook has become more gloomy, especially as the profit forecast in the April Tankan was for an 0.3% rise in the coming year.
Higher raw material prices are not helping. Iron ore and coking coal costs have surged sharply in recent price settlements with exports from Australia, Brazil, Canada and other suppliers.
In return, Nippon Steel the country’s biggest producer has boosted prices by 40% for its biggest selling lines, including hot and cold rolled steels. That will flow through into shipbuilding, cars, whitegoods and construction, as in South Korea.
Analysts in Tokyo say that not even a 4% decline in the value of the yen since April has lifted confidence among big companies, all of whom are exporters.
Japan’s currency has weakened by 4% since the previous Tankan on April 1. Large manufacturers see the yen trading at 102.74 on average this year.
Crude oil prices have doubled in the past year and reached a record $US143.67 a barrel yesterday; food prices have surged, especially the cost of corn (used for meat production) and wheat (noodles).
The Tankan showed that confidence among big service-sector companies fell to a four-year low of 10 points in June from 12 in March, a sign that demand by the Japanese consumer is feeling fatigued, especially with price deflation still happening (after stripping out the soaring cost of petrol and food, prices are still falling at the consumer level).
The survey was conducted from May 28 to Monday, June 30.
Japanese wages edged up 0.2% in May, the smallest increase so far in 2008, according to figures out yesterday.
The results of the Tankan survey came two days after industrial production figures showed that Japanese manufacturers were handling the slowing demand and high commodity prices.
Industrial production rose 2.9% in May, slightly better than forecast and well up on the fall of 0.2% in April.
The jobless rate remained constant at 4.0% in May, another encouraging sign.
However consumer spending fell, thanks to higher prices for petrol, foodstuffs and other products.
According to government figures, average household spending fell a real 3.2% in May from the same month a year earlier, with the average monthly income of households down 0.6%.
Core consumer prices, excluding fresh food, jumped to 1.5% from 0.9% in April, largely as the result of a reinstatement of a petrol tax temporarily removed because of political haggling.
However, eliminating energy and food, saw prices still falling at 0.1% a year, which is not good news for the overall economy.
