Japan's Major Manufacturers Stay Cautious Amid Global Uncertainties — Update

By Megumi Fujikawa

TOKYO--Sentiment among large Japanese manufacturers held steady during the three months to September, a Bank of Japan survey showed, indicating that uncertainties over the global economy kept them cautious about their business outlook.

The main index gauging sentiment among big manufacturers was +13, unchanged from the previous survey in June, according to the central bank's quarterly tankan corporate survey released Tuesday.

Optimism levels remained stable as businesses weighed the impact of China's economic slowdown and the yen's appreciation. The index represents the percentage of companies that said business conditions were favorable minus those that said conditions were unfavorable.

Analysts look at the survey data to get a sense of the mood in corporate Japan and insight into the health of the economy as they seek hints on the timing of the BOJ's next rate increase.

Business sentiment is likely to tread water in the coming months due to tepid domestic demand, hiccups in industrial production and weak external demand, said Moody's Analytics economist Stefan Angrick.

"Given the subdued backdrop, a premature shift towards tighter monetary and fiscal policy could further weigh down the economy and potentially precipitate a broader downturn," Angrick said in a note.

Japan's incoming prime minister, Shigeru Ishiba, has been seen in favor of tighter fiscal policy. Analysts also expect Ishiba to tolerate more rate increases by the Bank of Japan.

Large manufacturers' sentiment is expected to improve only sightly in the next December survey, while the mood among big non-manufacturers is projected to deteriorate, according to Tuesday's results. The survey was conducted from Aug. 27 to Sept. 30.

The tankan showed that large manufactures made their profit projections on the assumption that the dollar will trade at 144.96 yen in the fiscal year ending in March. They forecast a 7.0% drop in their pretax profit for this business year.

Analysts say exporters will have to lower their profit projections if the yen stays stronger than they expect. A stronger yen shrinks Japanese companies' overseas earnings when repatriated into the Japanese currency.

The yen reversed its downtrend against the dollar after the BOJ raised interest rates to 0.25% at the end of July and pledged to keep tightening. The Japanese currency was trading at around 143.80 to the dollar on Tuesday, compared with a more than three-decade low of 162 reached in early July.

At its previous policy-setting meeting in late September, the BOJ's board discussed uncertainties over the economic outlook, including the pace of rate cuts by the Federal Reserve and its impact on the yen and Japanese companies' profits, according to a summary of opinions released Tuesday.

"With the yen's depreciation being rapidly retraced, there is concern over the possibility that the pass-through of cost increases to consumer prices will be reversed due to a decline in raw-material prices and export volume will decrease, and that this could affect firms' profits, their appetite for wage hikes and private consumption," one of the nine policy board members said at the meeting held on Sept. 19 and Sept. 20.

BOJ Gov. Kazuo Ueda has said he expects wage hikes to continue next year and beyond, contributing to a virtuous cycle of wages, spending and mild inflation.

In an early sign of another year of solid wage growth in Japan, Suntory Holdings Chief Executive Takeshi Niinami has recently said he would give an about 7% pay increase to workers at annual negotiations next year. If Suntory follows through, that would mark a third straight year of a 7% wage hike.

With high-profile companies like Suntory pledging pay rises, policymakers expect peer pressure to help continue to spur wage growth in Japan amid a chronic labor shortage.

Government data released Tuesday added to signs that the country's labor market remains tight, with unemployment declining to 2.5% in August from 2.7% in July.

Another sign that the BOJ's virtuous cycle is taking shape lies in companies feeling comfortable about raising product prices.

Suntory's soft-drink unit has raised prices of its products, including bottled coffee, by 6% to 32%, from Tuesday. The company cited the yen's weakness, higher raw-material costs and increases in labor expenses as reasons behind the decision.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com

(END) Dow Jones Newswires

September 30, 2024 23:13 ET (03:13 GMT)

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