July 1, 2013 / 12:46 AM / 5 years ago

UPDATE 3-Japan business mood turns positive, BOJ may upgrade econ view

* Big manufacturers' sentiment index +4 vs -8 in March
    * Large non-manufacturers' mood also improves - tankan
    * Big firms project 5.5 pct rise in FY2013/14 capex
    * Robust spending giving firms room to raise prices
    * BOJ seen standing pat, may revise economic assessment

    By Leika Kihara and Tetsushi Kajimoto
    TOKYO, July 1 (Reuters) - Japanese manufacturers' sentiment
turned positive in the three months to June for the first time
in nearly two years, a closely-watched central bank survey
showed, a sign the recent market turbulence has yet to hurt the
feel-good mood created by the government's reflationary
    Service-sector sentiment also improved and more companies
see room to raise prices due to robust private consumption, the
"tankan" survey showed, boding well for the Bank of Japan's plan
to end 15 years of grinding deflation and achieve its 2 percent
inflation target through aggressive monetary stimulus.
    The central bank will consider revising up its assessment of
the economy at its rate review next week, reflecting the upbeat
survey results that included plans for a healthy increase in
corporate capital expenditure, sources familiar with the BOJ's
thinking said. Last month, the central bank said the economy was
"picking up".
    A brighter view of the economic outlook would heighten the
chance the BOJ will hold off on additional monetary easing in
coming months.
    "The improvement in big firms' sentiment was largely driven
by yen weakness, which supported exports, and the recovering
economy overall," said Taro Saito, senior economist at NLI
Research Institute in Tokyo. "The BOJ probably doesn't need to
act immediately."
    The headline index for big manufacturers' sentiment improved
12 points from three months ago to plus 4, slightly better than
a median market forecast of plus 3 and the highest level since
March 2011, the quarterly tankan survey showed on Monday.
    That was the second straight quarter of improvement and the
first positive reading - which means optimists outnumbered
pessimists - since the survey of September 2011, a vindication
of Prime Minister Shinzo Abe's "Abenomics" policy of aggressive
monetary stimulus and fiscal spending.
    Service-sector sentiment also brightened with the index for
big non-manufacturing companies rising 6 points to plus 12, a
tad higher than a median market forecast of plus 11.
    Big manufacturers expect business conditions to improve
further three months ahead, suggesting they see the negative
effect of the recent market turbulence on the economy as limited
- at least for now.
    The survey was compiled amid acute volatility that drove up
bond yields and erase a chunk of the gains in Tokyo shares made
on investors' big hopes for Abe's stimulus plans. But sentiment
improved across sectors and even among small firms, a sign the
benefits of "Abenomics" was broadening.
    Big firms intend to increase capital expenditure by 5.5
percent in the current business year from April, more than a
median market forecast of a 2.9 percent increase. This suggests
that the positive mood is finally prompting companies - long
hesitant to spend due to the murky economic outlook - to expand
    That is an encouraging sign for the BOJ, which has been
focusing on capital spending figures to gauge whether the
psychological impact of its reflationary policy will translate
into real demand.
    The yen's drop against the dollar played a large part in
brightening sentiment among automakers and electronic giants.
Big manufacturers now expect the dollar to average 91.20 yen in
the current business year, much higher than the 85.22 yen
projected three months ago.
    The new projection is still lower than current dollar/yen
levels of around 99 yen, suggesting that exporters will enjoy
further gains in profits if exchange-rates stay not far from
recent levels.
    In another positive sign, robust private consumption is
making companies feel more comfortable about raising the price
of their goods, mostly to pass on the rising costs of imports
from the weak yen.
    An index measuring how companies see price moves in the
future turned positive for big non-manufacturers, meaning more
of them expect the price of their goods to rise rather than fall
three months ahead, the tankan showed.
    "If you ask whether Abenomics boosted business sentiment, I
would say all in all, yes," said Hideo Kumano, chief economist
at Dai-ichi Life Research Institute in Tokyo.
    "If companies can start passing on the rising costs (to
consumers), the improvement in business sentiment will spread
from big firms to smaller firms," he said.
    Financial markets have rallied strongly since Abe first
highlighted his brand of aggressive policymaking late last year.
They got a further boost in April, when the BOJ unleashed an
intense burst of stimulus by pledging to double the supply of
money in two years.
    But the positive market sentiment turned around in late May
when the BOJ's huge asset purchases disrupted the bond market
and drove up yields which, coupled with expectations of the U.S.
Federal Reserve's tapering of monetary stimulus, hit global
stocks and triggered a rebound in the safe-haven yen.
    Since the middle of last week, global markets have
stabilised somewhat. The upbeat tankan results helped push up
Tokyo's Nikkei stock average by 1.3 percent on Monday to a
one-month high. 
    The tankan's sentiment indexes are derived by subtracting
the percentage of respondents who say conditions are poor from
those who say they are good. Nearly 70 percent of the companies
that replied did so by June 11, the central bank said.
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