Japan’s Business Mood Weakens as Costs Soar on War, Weak Yen

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Japan’s biggest companies took a gloomier view of business conditions for the first time since the start of the pandemic recovery, as fears grow over the wider impact of Russia’s invasion of Ukraine and soaring costs on a fragile economy. 

While large firms remain optimistic, an index of sentiment among the country’s biggest manufacturers dropped to 14 from a revised 17 in the previous quarter, the first deterioration since June 2020, according to the central bank’s quarterly Tankan report Friday.

The mood among large non-manufacturers slipped to 9 from a revised 10 in the December report. The index subtracts the percentage of firms with pessimistic views from those with optimistic views.  

The results reflect the mood among businesses after considering the effect of omicron restrictions and a potential rebound from their lifting, soaring energy costs, a slide in the yen and the implications of the war in Ukraine. The impact of these factors varies between sectors depending on their reliance on global trade, their domestic focus and size.

The deterioration fed into a dimmer outlook for the coming months and smaller spending plans for the coming fiscal year, a cause for concern for Prime Minister Fumio Kishida as he tries to keep Japan on a recovery track ahead of a summer election. 

The results are likely to provide further backing for government economic measures and for the Bank of Japan’s stance for monetary easing even though inflation readings are widely expected to jump from this month on higher energy costs. 

“Rising prices of commodities and imports are hurting businesses. This is certainly not a favorable macro condition and it makes sense that some companies are left with no choice but to raise prices for consumers,” said economist Nobuyasu Atago at Ichiyoshi Securities Co.

The sharp policy divergence between the BOJ and other major central banks that are tightening policy will continue to weaken the yen and push up import costs going ahead, he said.

“The BOJ is in a tough spot and all the government can do is to try to moderate the yen’s fall via communication from officials like the finance minister,” he added.

What Bloomberg Economics Says…

“Large firms on average cut their investment plans. With cost-push inflation and weaker business conditions ahead, it’s hard to see the Bank of Japan normalizing its policy anytime soon.”

— Yuki Masujima, economist 

For the full report, click here. 

Companies have had plenty to get gloomy about since the last survey in December.

The number of Covid cases surged to a record high through the middle of February, squeezing domestic service-sector businesses, while the Russian invasion added to the fastest rising business costs in four decades. A strong earthquake hit northern region in March, disrupting economic activities and supply chains including those of Toyota Motor Corp., another negative factor for companies. 

Looking ahead, the survey showed large businesses across all industries plan to increase investment by 2.2% for a fiscal year starting this month, worse than the 4.4% expected by economists and the 3% figure from a year earlier.

Rising raw materials costs are also affecting the inflation outlook among Japanese businesses. They see an annual price growth rate of 1.6% in five years’ time, the highest forecast since 2015. An index for output prices among large manufactures rose to 24, the highest since 1980.

Japanese businesses across all industries and sizes see the yen averaging 111.93 against the dollar for the fiscal year, much stronger than the current level as more than 70% had responded by March 11. The yen was at 122.1 as of Friday morning. Businesses’ foreign exchange forecasts tend to be conservative and adjusted cautiously.  

“Companies are still gauging the impact of the war in Ukraine and its effect on commodity prices so uncertainties are very high for the outlook of the economy,” said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley. “Today’s report supports the BOJ’s case to continue with stimulus.”

The rapid weakening of the yen has become a concern for many domestically focused businesses as it touched the lowest level since 2015 Monday following the BOJ’s announcement of unlimited bond-buying operations. While a softer currency helps inflate the profits of big exporters, small companies and households are likely to be hit hard.

(Adds more details from release.)

More stories like this are available on bloomberg.com