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TOKYO (Reuters): Japanese business sentiment worsened for the first time in two years in the three months to March, a closely watched central bank survey showed on Monday, as rising raw materials and labour costs weigh on an otherwise steady economic recovery.
A strong yen and simmering fears of a trade war, triggered by US President Donald Trump’s move to impose tariffs on Chinese goods, could further undermine corporate morale if threats of retaliation escalate, analysts say.
But few analysts expect the economic recovery to falter as business confidence remains at a decade-high level and companies plan to increase capital expenditure.
“Yen gains since late January have eroded manufacturers’ sentiment but solid global economic fundamentals helped offset the pain. Overall, you can say that business confidence held firm,” said Yuichiro Nagai, an economist at Barclays Securities.
“Fears of a global trade war have had a limited impact on business sentiment so far. But depending on development of US trade policy, protectionism could weigh on the outlook.”
An index measuring big manufacturers’ confidence fell by 2 points to plus 24 in March, the Bank of Japan’s quarterly “tankan” survey showed, roughly matching a median market forecast of plus 25. Non-manufacturers’ sentiment worsened by 2 points to plus 23 against a median forecast of plus 24, deteriorating for the first time in six quarters.
Both big manufacturers and non-manufacturers forecast business conditions would sour three months ahead, the tankan showed, reflecting looming uncertainty over the fallout from Trump’s trade policy and a strong yen. “This should not be taken as turning point for Japan’s economy although sentiment deteriorated slightly,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “Concerns are high over possible retaliation against US tariffs, but the global economy remains in a gradual recovery which is good for Japan’s value-added exports.”
About 70% of companies replied to the survey by March 12, after Trump unveiled steep tariffs on steel and aluminium imports but before his announcement of anti-China tariffs.
Big manufacturers expect the dollar to move around 109.66 yen on average during the year that began in April, much weaker than the current levels around 106 yen. If the yen’s gains continue, manufacturers may be forced to cut their optimistic profit forecasts – a worry for Prime Minister Shinzo Abe who is pursuing growth with reflationist policies.
Labour shortages also weighed on sentiment, as economic recovery and a dwindling working-age population push the jobless rate to a near 25-year low. A tankan index measuring capacity constraints showed that companies saw the job market at its tightest since 1991. “Labour shortages are having a negative impact particularly on labour-intensive service-sector firms,” said Satoshi Osanai, senior economist at Daiwa Institute of Research.
He said rising wages could stoke a “virtuous growth cycle” of consumer spending, rising prices and increased investment if companies could pass on their higher costs to generate profit. “The key to making this happen is whether consumers are willing to spend their increased earnings, but so far there’s little sign of that happening.”
