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Business climate in Japan deteriorates as a result of China's lockout and growing prices

Image: Reuters Berita 24 English - According to a central bank survey released on Friday, the mood among Japan's major manufacturers wor...

Image: Reuters

Berita 24 English - According to a central bank survey released on Friday, the mood among Japan's major manufacturers worsened for the second consecutive quarter in the three months leading up to June as a result of growing input costs and supply interruptions brought on by China's stringent COVID-19 lockdowns.

However, the "tankan" quarterly survey revealed an increase in confidence among large non-manufacturers throughout the quarter, suggesting service-sector businesses are overcoming the pandemic's negative effects as the government removes restrictions on operation.

According to the tankan, businesses anticipate increasing capital spending and are gradually shifting costs to customers, indicating the economy is still headed for a modest rebound.

Analysts, however, caution that the future is unclear as domestic and export demand are being affected by rising concerns about a U.S. economic recession and ongoing price increases for basic goods.

"The tankan figures aren't that shabby overall. The robust capital investment plan is unexpected and demonstrates that corporate spending appetite is still strong "said Yoshiki Shinke, director of Dai-ichi Life Research Institute's economics department.

"However, manufacturers anticipate lower profitability, which may have an impact on their future expenditure plans. The prognosis is further clouded by rising input costs and potential for decreasing U.S. GDP."

Separate statistics revealed that core consumer prices in Tokyo, the capital of Japan, climbed by 2.1 percent from a year earlier in June. This was the quickest rate of growth in seven years and is a leading predictor of trends across the country.

The headline indicator for the tankan, which measures the mood of major manufacturers, fell to plus 9 in June from plus 14 in March, marking its lowest point since March 2021. It was contrasted to a plus 13 median market projection.

The big non-manufacturers' sentiment index increased from plus 9 in March to plus 13 in June, which was just below the median market prediction of plus 14.

An indicator gauging output prices reached the greatest level for large manufacturers since 1980 and the highest level for large non-manufacturers since 1990, the tankan indicated, indicating that more businesses were able to pass on increased costs to consumers.

Large corporations anticipate raising capital expenditure by 18.6 percent in the current fiscal year that ends in March 2023, significantly more than the median market expectation of an increase of 8.9 percent.

Due to China's rigorous COVID lockdowns, rising raw material prices, and supply chain disruptions that reduced industry output, Japan's GDP most likely stagnated in the current quarter. Data released on Thursday revealed that in May, output decreased to the greatest extent in two years.

Policymakers are hopeful that the pandemic's drag on consumption would be compensated by a comeback in consumer spending, which will also help manufacturing activity. However, the recent decline in the yen is increasing the cost of imported food and fuel, making matters worse for households.

Contrary to the belief of BOJ Governor Haruhiko Kuroda, who believes that the present cost-push inflation will only last temporarily, the tankan showed companies' inflation forecasts rising.

According to the June tankan, businesses expect consumer prices to increase by 2.4 percent in a year, up from their earlier forecast of 1.8 percent. Companies anticipate a 2 percent increase in consumer prices over the next three years, up from a 1.6 percent increase in the March survey.

Comparatively, according to the BOJ's most recent predictions from April, core consumer inflation will peak at 1.9 percent in the current fiscal year that ends in March 2023 before declining to 1.1 percent the following year.

Many analysts anticipate that when the BOJ releases new quarterly predictions at its upcoming meeting on July 20-21, it will increase its forecast for core consumer inflation for this fiscal year above 2 percent.

However, other analysts question whether inflation will continue to increase at the current rate.

Takeshi Minami, chief economist of Norinchukin Research Institute, predicted that inflation will remain at its present level through the end of the year before peaking.

"The tightening of monetary policy in other significant economies may lead to a worldwide recession. If that occurs, the BOJ will forfeit the opportunity to normalise policy and may be compelled to ease once more."

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