Japanese manufacturers’ business confidence deteriorated in December 2016, with pessimism exceeding optimism for the first time in 10 months, according to the Reuters Tankan survey. Concerns surrounding US protectionist policies under then President-elect Donald Trump and the ongoing slowdown in the Chinese economy were cited as key factors contributing to the negative outlook. This decline in sentiment raises questions about the Bank of Japan’s optimistic economic forecasts.
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Reuters Tankan Survey Reveals Pessimism
The Reuters Tankan survey, conducted among 505 large non-financial Japanese firms, revealed a significant drop in manufacturers’ sentiment index to minus 1 in December, down from plus 5 in November. This marked the first negative reading since February 2016 and signaled a shift towards pessimism among Japanese businesses. While a rebound to plus 5 is anticipated by March 2017, the December figures highlight growing anxieties within the manufacturing sector. The Tankan indexes are calculated by subtracting the percentage of pessimistic respondents from optimistic ones, with a negative result indicating a prevalence of pessimism.
US Protectionism and China’s Economic Woes Fuel Concerns
A wide range of manufacturing industries, including electronics, steel, and nonferrous metals, reported declining confidence. Many respondents pointed to the potential for disruptive international trade policies under the incoming Trump administration, specifically citing concerns about new and potentially substantial tariffs. Several respondents reported delays in investment projects due to the uncertainty surrounding the new US administration’s policies.
Furthermore, the survey highlighted ongoing concerns about the Chinese economy. Respondents noted that the prolonged weakness in China, exacerbated by a property crisis, high local government debt, and sluggish consumption, continued to negatively impact sales. Fears of a potential trade war between the US and China further amplified anxieties among Japanese businesses already grappling with the challenges posed by China’s economic slowdown.
Service Sector Shows Resilience
In contrast to the manufacturing sector, the service-sector index showed improvement, rising to plus 30 in December from plus 19 in November, and is projected to reach plus 32 in March. This positive trend was attributed to factors such as strong inbound tourism and the ability of some service providers to pass on costs to consumers, offsetting challenges like driver shortages.
Economic Recovery Remains Fragile
While Japan’s GDP growth for July-September 2016 was revised upwards to an annualized 1.2%, fueled partly by better-than-expected capital expenditure, a downward revision in consumption underscored the fragility of the economic recovery. The decline in manufacturer sentiment further emphasizes the challenges facing the Japanese economy and raises questions about the sustainability of its growth trajectory. The concerns highlighted in the Reuters Tankan survey underscore the potential headwinds facing the Japanese economy in the coming months.
