Japanese manufacturers’ mood sours due to global slowdown, service sector’s spring cushions blow

TOKYO, April 3 (Reuters) – Japanese manufacturers’ sentiment hurt in the first quarter to the worst level in more than two years, overshadowing a rebound in service sector sentiment, a central bank survey showed, reinforcing views a strong post-COVID economic recovery is a while away.

Corporate inflation expectations hit a new high with businesses estimating that inflation will remain above the Bank of Japan’s 2% target five years from now, the “tankan” showed on Monday.

The result underscores the difficult task ahead of incoming Bank of Japan (BOJ) Governor Kazuo Ueda in deciding how soon to phase out his predecessor’s massive stimulus program.

While steady wage growth and an end to covid-19 mitigation could keep the economy on a solid footing, slowing global growth could derail the export-dependent recovery, analysts say.

“External factors will continue to weigh on business morale in the coming months” as the global economy slows under the weight of US and European monetary tightening, said Takeshi Minami, chief economist at the Norinchukin Research Institute.

“Given the fragile nature of Japan’s recovery, the BOJ is not in a position to normalize monetary policy anytime soon,” he said.

The headline index measuring major manufacturers’ sentiment fell to plus 1 in March from plus 7 in December, the tankan showed, worse than a median market forecast for a reading of plus 3. It was the fifth consecutive quarter of deterioration and the worst level hit since December 2020.

Sentiment soured for a broad sector of manufacturers with many firms complaining about the impact of rising commodity and fuel costs, as well as slowing overseas growth and falling chip demand, a BOJ official told a briefing.

By contrast, the index of major non-manufacturers for a fourth quarter rose to plus 20 from plus 19 in December, as hopes of a recovery in tourism and service demand brightened morale among retailers and hotels.

But companies in the service sector expect business conditions to worsen three months ahead, the tankan showed, as rising commodity and labor costs cloud the outlook.

The survey will be among key data the BOJ will scrutinize to produce new quarterly growth and inflation estimates at its meeting on 27-28. April – the first to be led by Ueda.

Japan’s economy narrowly averted a recession in the final three months of 2022, and analysts expect any recovery in the January-March quarter to have been modest, as low wage growth and rising living costs hurt consumption.

Many large firms promised sharp wage increases in spring wage talks with unions, giving politicians hope that consumption will pick up again and pick up the slack from an expected decline in exports.

The poll showed big firms plan to increase capital spending by 3.2% in the fiscal year that began in April, which analysts see as bullish given that it follows a hefty 16.4% gain the year before.

The strength of the economy, as well as the wage and inflation outlook, will be key to how quickly the BOJ can adjust or end its bond-rate control policy that has been criticized for distorting market prices and hurting financial institutions’ margins.

Companies expect inflation to reach 2.8% a year from now, 2.3% in three years and 2.1% in five years. .

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

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