Mixed Signals for Japanese Economy
The Bank of Japan's latest Tankan report, released on August 18, 2023, paints a mixed picture of the Japanese economy. While sentiment among large manufacturers has declined for the first time in a year, optimism is at a three-decade high among large businesses outside the manufacturing sector.
Manufacturers Feeling the Pinch
The Tankan report, which surveys about 9,000 Japanese companies every three months, showed that sentiment among large manufacturers, including auto and electronics giants, declined to plus 11 in March, down two points from December. This decline is attributed to production stoppages at Daihatsu Motor Co., a Toyota subsidiary specializing in small vehicles, due to improper safety tests.
Non-Manufacturers See Brighter Days
In contrast, the index for large-scale non-manufacturers, including the service sector, hit a 33-year high at plus 34 points, up two points from December. This optimism reflects the return of tourism, both overseas and domestic, which had been hurt by the pandemic. Incoming travelers have recently outpaced pre-pandemic levels.
Challenges Remain
Despite the positive outlook for non-manufacturers, the Japanese economy faces several challenges. Slow wage increases, deflation, and soaring energy prices continue to weigh on growth. Additionally, the weakening currency, while beneficial for tourism and exporters, hurts some sectors.
Bank of Japan's Policy Stance
The Bank of Japan raised its benchmark interest rate last month for the first time in 17 years, ending a longstanding policy of negative rates meant to boost the economy. The bank has an inflation target of 2% and expects monetary policy to remain easy for some time, while noting that wages and profits at companies are improving.
Looking Ahead
The Tankan report's forecast for future sentiment among large manufacturers stands at 10, while the index for large non-manufacturers is 27, both lower than the levels reported in March. This suggests that the mixed signals in the current report may continue in the coming months.