March 19, 2019 / 11:07 PM / a month ago

Japan factory mood hits weakest since 2016 as trade rifts bite: Reuters Tankan

TOKYO (Reuters) - Confidence among Japanese manufacturers hit its weakest in two-and-a-half years in March, a Reuters poll showed, as global trade friction fueled concerns that a postwar record growth cycle driven by Abenomics may be over.

FILE PHOTO: A man cycles past chimneys of facotries at the Keihin Industrial Zone in Kawasaki, Japan September 12, 2018. REUTERS/Kim Kyung-Hoon

The monthly poll, which tracks the Bank of Japan’s (BOJ) closely watched tankan quarterly survey, found confidence fell for a fifth straight month while sentiment in the service sector held steady, suggesting domestic demand is unlikely to offset external risks such as the trade war and China’s slowdown.

Both manufacturers’ and service-sector morale is expected to rise just slightly over the coming three months, underscoring a bumpy road ahead for the world’s third largest economy, according to the Reuters Tankan.

The central bank will closely read the results of its official tankan due out April 1 for clues on strength of sentiment and capital expenditure at its policy meeting next month when it issues fresh economic and price projections.

The BOJ stood pat at its policy review last week, citing an economy posting gradual growth, but cut its views of exports and output due to increasing headwinds from overseas.

Slowing growth in Europe and China, the Sino-U.S. trade war and uncertainty surrounding Britain’s exit from the European Union have strained businesses around the world.

While U.S. President Donald Trump and Chinese President Xi Jinping appear to be closer in striking a truce in the U.S.-China trade war, Japan’s export sector remains vulnerable to the fallout from trade friction between the world’s two largest economies.

In the Reuters poll of 479 large- and mid-sized companies, completed by 250 firms on the condition of anonymity over the March 4-15 period, managers also complained about costs of raw materials squeezing profits.

Sluggish consumer spending makes it difficult to pass on such costs to thrifty customers, they wrote in the survey.

“Our clients are turning cautions on capital expenditure due to the U.S.-China trade war, spreading protectionism and political jitters in emerging countries,” a manager of a machinery maker wrote in the survey.

The Reuters Tankan sentiment index for manufacturers fell three points to 10 in March, with exporters of electronics, precision equipment, steel and nonferrous metals especially gloomy.

The manufacturers’ index was down 13 points from three months ago, indicating the possibility of a similarly sharp decline in the BOJ tankan. The Reuters Tankan index is expected to inch up to 11 in June.

The service-sector index held steady at 22 in March from a month earlier but was down from 31 seen three months ago, indicating a likely decline for the sector in the official tankan, which measures confidence on a quarterly basis.

The service-sector index is seen edging up to 23 in June.

The BOJ’s last tankan out in December found the business mood held steady from three months ago, but business conditions were seen worsening ahead amid trade war and slowdown in China.

The Reuters Tankan indexes are calculated by subtracting the percentage of pessimistic respondents from optimistic ones. A positive figure means optimists outnumber pessimists.

Reporting by Tetsushi Kajimoto; Editing by Sam Holmes

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