Japan firms most upbeat in 3 years

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Japan is ripe for recovery, a key survey finds. AFP

TOKYO (Reuters) – Confidence among Japan’s big manufacturers hit its highest level in more than three years in the June quarter, a closely-watched central bank survey showed, adding to signs the recovery in the world’s third largest economy is gaining pace.

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Big firms also saw the job market at its tightest in 25 years, offering policymakers some hope that companies may finally raise wages, helping broaden an economic recovery.

The survey underscores the Bank of Japan’s view that the economy is heading for a moderate expansion, though sources say weak price and wage pressures are likely to force it to slash its inflation forecasts later this month.

The headline diffusion index (DI) measuring big manufacturers’ sentiment stood at plus 17 in June, the BOJ’s quarterly “tankan” survey showed yesterday, its third straight quarter of improvement and up from plus 12 in the previous survey in March.

This exceeded a median market forecast of plus 15 and was the highest since March 2014, as carmakers and machinery firms benefitted from robust demand in Asia.

“Taken together, the survey backs up the BOJ’s optimism on the economy,” said Yuichiro Nagai, an economist at Barclays Securities.

“But a gap remains between a strong economy and tepid inflation. If the BOJ revises down its price forecasts at the upcoming meeting, investors will recognise that an exit from ultra-loose monetary policy will be some time away.”

Big non-manufacturers’ sentiment index stood at plus 23, up from plus 20 in March and matching a median market, the tankan showed. It was the second straight quarter of improvement and the highest level since December 2015.

Both big manufacturers and non-manufacturers expect business conditions to worsen slightly three months ahead, the survey showed, underscoring their concern on overseas economic uncertainties.

The tankan will be among factors the BOJ’s nine-member board will scrutinise when it meets on July 19-20 to review monetary policy and its quarterly growth and inflation estimates.

A separate survey showed Japanese manufacturing activity expanded at a slightly slower pace in June, though an upward revision to export orders suggests the factory sector remains on a firm footing.

Japan’s economy expanded at an annualised rate of 1.0 percent in the first quarter on robust exports and a boost from private consumption, prompting the BOJ to upgrade its economic assessment in April.

But consumer inflation remains subdued as companies remain wary of raising prices for fear of scaring away cost-sensitive households, underscoring the scale of the challenge the BOJ faces in achieving its ambitious two percent target.

While companies remain wary of boosting wages or capital expenditure, there are signs of change as they face capacity shortages.

An index measuring big manufacturers’ production capacity showed more of them now feel they face a shortage, rather than an excess, of facilities to produce goods.

Big firms plan to raise their capital spending by 8.0 percent in the current fiscal year to March 2018, exceeding market forecasts for a 7.4 percent rise, the survey showed.

An index measuring job conditions showed big firms saw the labour market at the tightest since 1992, the tankan showed, reinforcing views a shortage of employees was among the key concerns for many companies.

Japanese companies plan to increase hiring of new graduates by 8.1 percent in the next fiscal year beginning in April 2018, which would be the eighth straight year of gains, the tankan showed.

The tankan’s sentiment diffusion indexes are derived by subtracting the number of respondents who say conditions are poor from those who say they are good. A positive reading means optimists outnumber pessimists.

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