Business climate in Japan rises to pre-Covid level

Despite the third wave of coronavirus and the shortage of microchips, sentiment among large companies in Japan’s manufacturing sector is turning positive. The Bank of Japan’s Tankan report confirms economic recovery.

The mood in Japan's industry has improved significantly.

AAs a signal of an upcoming economic recovery, the mood among the major Japanese industrial companies has turned positive for the first time since autumn 2019. In the Bank of Japan’s quarterly Tankan survey, the index of business conditions for large working companies rose from minus ten to plus five points in March. The indicator was last at this level in September 2019. That was before the consumption tax increase and before the outbreak of the Covid pandemic. The positive value of the index indicates that more large companies assess the situation positively than negatively.

Despite the third wave of infections in Japan, which ended in March, and despite the global shortage of semiconductors, the result was better than expected by financial analysts on average. In the first quarter of the year, companies apparently took the strain off comparatively well. The Bank of Japan collected the survey results from late February to late March.

On the positive side for the Japanese economy, there is the fairly stable exchange rate of the Japanese yen in recent months and the emerging global economic recovery, to which, as in the United States, large additional government spending is contributing to boost the economy. The Bank of Japan only confirmed in March that it would like to maintain its highly expansionary monetary policy.

The majority of economists expect the Japanese economy to contract in the period from January to March after a strong second half of 2020, primarily as a result of the temporary virus emergency in Tokyo and other major cities in the country. For the new fiscal year beginning this Thursday, however, a strong recovery is forecast. The economists at Morgan Stanley MUFG, for example, expect growth of 3.9 percent, after a decline of 4.8 percent in the past fiscal year. Private consumption held up quite well in February despite the corona worries. The unemployment rate was most recently unchanged at 2.9 percent. However, this does not take into account many temporarily released workers.

Dollar in Yen

USD/JPY

— (–)
  • 1T
  • 1W
  • 3M
  • 1J
  • 3J
  • 5J

To the detailed view

The brightening of the business climate in the manufacturing sector spread through almost all sectors. The improvement was particularly strong in the construction of machines for production, in the metal industry and in vehicle construction. This indicates, among other things, that the lack of semiconductors lamented in the auto industry has not yet had a dramatic impact on Japanese automakers. At the start of the new fiscal year beginning this April, the big manufacturing companies forecast that they would increase their investments by 3.2 percent. The improvement in the situation among large manufacturing companies also had an impact on medium-sized and smaller companies through supplier relationships.

The mood among service companies improved to a much lesser extent. The corresponding indicator rose from minus four to minus one point. The mood worsened among hotels and restaurants, whose business suffered from the third corona wave in Japan until March.

In the Tankan survey, the Bank of Japan asked 10,000 companies from all sectors of the economy about their assessment of the economic situation every three months. The Tankan report is an important indicator of economic development in Japan and is comparable in importance to the Ifo business climate index in Germany.

NIKKEI

— (–)
  • 3M
  • 1J
  • 3J
  • 5J

To the detailed view

“As in the rest of the world, sentiment among large Japanese companies has risen well beyond economists’ expectations since December. However, it is far less exuberant than in the United States. The situation is more similar to that in Europe, ”says John Vail, chief global strategist at asset manager Nikko.

The mood in small businesses is improving from a very low level, but remains quite low in both manufacturing and services. This is partly due to the Corona restrictions, which hit the service sector very hard, but also to the fact that many companies are not able to effectively rely on home work.