Japan business mood signals pick-up in private consumption

A shopper looks at items outside a discount store at a shopping district in Tokyo, 18 June

TOKYO (Reuters): Confidence at Japanese manufacturers in June rose for the second straight month and retailers were at their most optimistic in over a year, a Reuters poll showed, offering a welcome sign that consumers may have finally shaken off the effects of a sales tax hike.

The Reuters Tankan – which closely tracks the central bank’s quarterly tankan survey – gives credence to the Bank of Japan’s view that the economic recovery will strengthen over the next year although analysts doubt its 2% inflation target is achievable in fiscal 2016.

The upbeat mood follows recent data that showed the world’s third-biggest economy grew at a much stronger-than-expected 3.9% annualised rate in the first quarter, led by businesses ploughing more capital investment.

While exports growth has lagged expectations, and the economy is seen slowing in the current quarter, any uptick in private consumption should support the BOJ’s argument for no near-term stimulus.

Most analysts, however, say the BOJ won’t be able to sit tight for too long - a view supported by still-low inflation and persistent slack in the economy. A Reuters poll predicted further monetary expansion in October.

“The GDP data, due in August, is likely to show sharp slowdown in April-June and we expect consumer prices to decline in July-September,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley.

“As both the economy and prices are seen undershooting BOJ’s projections, further easing would be inevitable,” she said.

In the current quarter, given inventory adjustment, sluggish private consumption and weak exports, Hiroshi Shiraishi, senior economist at BNP Paribas, expects growth to slow to an annualised rate of around 0.5%.

The monthly poll of 481 big and midsize companies between 2 and 15 June, of which 263 responded, showed manufacturers’ mood is seen improving further and service-sector morale remaining unchanged after rising for a third straight month in June.

Encouragingly, the outlook appeared to brighten for private consumption, which makes up about 60 percent of the economy, with retailers’ mood jumping to the highest since March last year, when consumers went on a buying spree before the sales tax rose the following month. It backed recent data showing consumers may be coming out of the cold.

“Retailers’ mood is likely reflecting firm domestic demand due to improving job market and rising wages,” said Yuichiro Nagai, economist at Barclays.

The Reuters Tankan sentiment index for manufacturers rose to 14 from 13 in May. The service-sector index rose to a record high of 36 from 33 in May – led by retailers – and up 15 points from three months ago.