Japan manufacturers' mood points to moderate economic recovery: Reuters Tankan

TOKYO Wed Jul 16, 2014 8:03pm EDT

Workers control a crane to move a steel coil inside a factory in Tokyo May 29, 2014. REUTERS/Yuya Shino

Workers control a crane to move a steel coil inside a factory in Tokyo May 29, 2014.

Credit: Reuters/Yuya Shino

TOKYO (Reuters) - Confidence among Japanese manufacturers held steady for a second straight month in July and is seen likely to edge up, a Reuters poll found, offering further evidence of sentiment gradually recovering from April's sales tax hike.

Reflecting weak private consumption, the service-sector mood including retailers slid in July, but it is seen rebounding over the next three months, according to the Reuters Tankan poll of 400 big firms between June 30 and July 14, of which 280 replied.

The Reuters Tankan, which closely correlates with the Bank of Japan's key tankan survey, supports the central bank's view that the economy is on track for a moderate recovery.

"Service-sector sentiment is weak, likely reflecting bad weather and a delayed recovery from the sales tax hike in some areas such as household appliances," said Yuichiro Nagai, economist at Barclays Capital in Tokyo.

"But given an expected improvement in their sentiment, firmness in manufacturers' mood, and recent positive indicators, the economy is likely to resume growth in the current quarter after a contraction in April-June," he said.

However, the lack of a growth engine clouds the economic outlook, with companies expressing their concerns about a big drop in demand after the April 1 sales tax hike and stagnant exports - particularly to China.

"Our sales dropped more than expected in May and June in reaction to the sales tax hike. The Chinese market remains sluggish as well," a chemicals firm said in the Reuters poll.

"The U.S. economy is firm but the world economy on the whole lacks momentum, particularly with the Chinese economy likely to remain sluggish for a long time," a nonferrous metal firm said.

Companies including oil refiners and food manufacturers blamed the high costs of oil and raw materials for squeezing their profits, while some others said they were facing supply constraints, such as labour shortages, that have delayed construction work.

In the Reuters Tankan, the sentiment index at manufacturers stood at plus 19, unchanged from June. The service-sector gauge was at plus 23 in July, down 6 points from the prior month.

Indexes are calculated by subtracting the percentage of pessimistic responses from optimistic ones.

The indexes for manufacturers and non-manufacturers are expected to improve to plus 21 and plus 29 respectively in October, meaning that optimists far outnumber pessimists.

The last BOJ tankan showed on July 1 that big manufacturers' mood soured in the three months to June but was seen improving in the current quarter, with large firms planning to raise capital spending more than initially estimated this fiscal year.

That finding did not quite tally with core orders for machinery falling a record 19.5 percent in May from the previous month in a highly volatile data series that is, however, regarded as an indicator of capital spending in the coming six to nine months.

The BOJ stuck to its massive monetary stimulus at a policy review on Tuesday. It trimmed its economic growth forecast for this fiscal year as exports remain weak and household spending tumbled after the sales tax rise.

The bank's nine-member board maintained its inflation projections and stuck to their view that the economy would continue recovering moderately as the impact of the tax rise faded.

(Editing by Eric Meijer)

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