Japanese manufacturers’ sentiment drops for the first time in 7 quarters as costs bite

Business confidence among major Japanese manufacturers deteriorated for the first time in seven quarters in March, hurt by energy and raw material costs that jumped following the Russian invasion of Ukraine and the pandemic-related supply bottlenecks, the Bank of Japan’s Tankan survey found on Friday.

The key index measuring sentiment among companies such as automakers and electronics makers fell to 14 in March from 17 recorded three months earlier, the lowest level since June 2021. It was above the average market forecast of 11 in a Kyodo News survey.

File photo taken in March 2020 showing the Bank of Japan headquarters in Tokyo. (Kyodo)

The index for major non-manufacturers, including the services sector, fell to 9 from 10 in the previous survey in December, underscoring the blow from restrictions imposed in response to the COVID-19 pandemic. The reading also marked the first deterioration in seven quarters.

The Tankan index represents the percentage of companies declaring favorable conditions minus the percentage declaring unfavorable conditions.

Russia’s attack on Ukraine that began Feb. 24 has pushed up crude oil and commodity prices amid spikes in geopolitical risk and supply issues. Russia is a major exporter of crude oil and natural gas.

The yen depreciated sharply against major currencies such as the US dollar and the euro, inflating the cost of imported raw materials.

“The results reflect growing corporate concerns about soaring commodity costs. The situation in Ukraine and the recent sharp depreciation of the yen prevent many companies from being optimistic,” said Toru Suehiro, senior economist at Daiwa Securities Co. .

Rising costs threaten to erode profits, with wholesale price inflation accelerating to its fastest pace in decades. Business sentiment in sectors ranging from pulp and lumber to chemicals and food deteriorated.

The cost spike comes as manufacturers grapple with parts shortages caused by the COVID-19 pandemic.

Japanese automakers, including Toyota Motor Corp., have been forced to cut production due to difficulties in sourcing parts such as semiconductors.

Confidence in the automotive sector fell further to minus 15 in March, from minus 8 in December, although it is expected to improve to minus 1 in the coming months.

Economists say a growing number of companies are protecting their profits by passing on rising raw material costs to consumers.

“As the infection situation stabilizes, service providers should see a recovery in demand,” Suehiro said. “But consumers, who have to pay more for energy and food because of rising prices, may have to cut spending on services (such as leisure and travel), putting pressure on profits. longer-term businesses.

The lingering impact of the COVID-19 pandemic was also felt among service providers, including hotels, restaurants and retailers, as anti-virus measures were in place in Tokyo, Osaka and other cities. other regions until March. Despite a recent improvement in the infection situation, there are concerns about the spread of the more transmissible BA.2 Omicron subvariant.

Hoteliers and restaurateurs were deeply pessimistic, with the index at minus 56, down 5 points from December, according to the survey.

Over the next three months, manufacturing sentiment is expected to deteriorate further to 9, while non-manufacturing sentiment is likely to fall to 7, according to the Tankan survey.

Large companies, defined as those with capital of 1 billion yen ($8.2 million) or more, expect a 2.2% increase in capital spending for the current fiscal year through next March. For the year just ended, it should have increased by 5.9%.

The yen fell to an over-six-year low last week amid divergent monetary policies between the BOJ and the US Federal Reserve, which is expected to carry out multiple rate hikes this year.

Firms in the Tankan survey expect the dollar to average 111.93 yen, well below the 122 yen area seen recently. The euro is projected at 128.18 yen for the current fiscal year.

The BOJ surveyed 9,362 companies, of which 99.1% responded between Feb. 24 and Thursday.

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