Japanese business sentiment deteriorates as costs weigh on outlook

TOKYO, Oct 3 (Reuters) – Business sentiment at Japanese manufacturers soured in the three months to September and corporate inflation expectations hit a record high as high material costs clouded a fragile economic outlook, a Bank of Japan survey showed. Shadowed.

The Bank of Japan’s Tankan survey showed that business capital spending plans for the current fiscal year remained strong, in part due to a weaker yen boosting exporters.

But fears of a global economic slowdown have clouded the outlook for an export-reliant economy just emerging from the coronavirus pandemic.

“Sentiment among large manufacturers was unexpectedly weak as slowing global growth hit the materials industry through lower commodity prices,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“If the global economy slows further, sentiment in other sectors could also deteriorate,” he said.

The tankan survey showed that the overall index of large manufacturers deteriorated from a positive 9 in June to a positive 8 in September, below the median market expectation of a positive 11 and worsening for the third consecutive quarter.

The non-manufacturing index came in at a positive 14 in September, up slightly from a positive 13 in June, marking the second straight quarter of improvement. That compares with a median market forecast of +13.

Large manufacturers expect business conditions to improve over the next three months, while sentiment among large non-manufacturers deteriorated, the survey showed.

In a silver lining, the tankan shows that large companies expect capital expenditures to increase by 21.5% in the current fiscal year to March 2023, compared with a 2.3% decline in the previous year.

The survey also showed that companies expect inflation to stay near the BOJ’s 2 percent target for the next few years, underscoring mounting inflationary pressures that could cast doubt on the BOJ’s commitment to keeping interest rates ultra-low.

The tankan shows that the company expects inflation to hit 2.6% annually from now and 2.1% over the next three years. They forecast inflation at 2.0 percent over the next five years, the highest level since comparable data emerged in 2014.

Japan’s economy grew at an annualized rate of 3.5% in the second quarter as the lifting of COVID-19 restrictions boosted consumption. But many analysts expect growth to slow in the third quarter as slowing global demand and rising raw material prices weigh on exports and consumption.

Reporting by Leika Kihara and Tetsushi Kajimoto; Editing by Sam Holmes

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