Big manufacturers’ mood worsens

Tokyo’s core consumer prices rise at the fastest pace in seven years in June

The mood among Japan’s big manufacturers’ soured for a second straight quarter in the three months to June, a central bank survey showed yesterday, hit by rising input costs and supply disruptions caused by China’s strict Covid-19 lockdowns.

But confidence among big non-manufacturers improved in the quarter, the “tankan” quarterly survey showed, suggesting service-sector firms are shaking off the drag from the pandemic as the government lifts curbs on activity.

Firms expect to ramp up capital expenditure and are steadily passing on costs to consumers, according to the survey, suggesting the economy remains on course for a moderate recovery.

Analysts, however, warn of a murky outlook as growing fears of a US economic slowdown and steady price hikes for daily necessities weigh on exports and domestic consumption.

“All in all, the tankan figures aren’t too bad. The strong capital expenditure plan is a surprise and shows corporate spending appetite remains solid,” said Yoshiki Shinke, chief economist at Daiichi Life Research Institute.

“But manufacturers expect to see profits fall, which could affect their spending plans ahead. Rising input costs and prospects of slowing US growth also cloud the outlook.”

In a sign of mounting inflationary pressure, separate data showed core consumer prices in Japan’s capital Tokyo — a leading indicator of nationwide trends — rose 2.1% in June from a year earlier to mark the fastest pace of increase in seven years.

The tankan’s headline index gauging big manufacturers’ mood slipped to +9 in the June quarter from +14 in the March quarter. It compared with a median market forecast of +13.

The big non-manufacturers’ sentiment index improved to +13 in the June quarter from +9 in March quarter, just below a median market forecast of +14.

In a sign more companies were able to pass on rising costs to consumers, an index measuring output prices hit the highest level since 1980 for big manufacturers and the highest since 1990 for big non-manufacturers, the survey showed.

Big companies expect to increase capital expenditure by 18.6% in the current fiscal year ending March 2023, much higher than a median market forecast for an 8.9% gain.

Japan’s economy likely stalled in the current quarter as China’s strict Covid lockdowns, soaring raw material costs and supply chain disruptions hurt factory output.

Policymakers are hoping that consumption will rebound from the pandemic’s drag and offset the weakness in manufacturing activity. But the yen’s recent plunge is pushing up prices of imported fuel and food, adding pain for households.

The survey showed companies’ inflation expectations heightening in a sign they expect the recent upward price pressure to persist, contrary to BoJ governor Haruhiko Kuroda’s view that current cost-push inflation will prove temporary.

Companies expect consumer prices to rise 2.4% a year from now, higher than a 1.8% rise projected three months ago. That compares with the BoJ’s current forecasts, made in April, that core consumer inflation will hit 1.9% in the current fiscal year ending in March 2023 before slowing to 1.1% the following year.