By Harumi Taguchi, Principal Economist, IHS Global Insight
JAKARTA - IHS Global has just provided updates on the Japanese economy. Followings are the highlights:
Key points:
· According to the Bank of Japan’s March Tankan survey — a short-term economic survey of Japan’s enterprises — the diffusion index (DI) of current conditions softened by 6 points to 6 for the large manufacturers and by 3 points to 22 for the large non-manufacturers, compared to the previous survey. The DI for small manufacturers fell to -4, first contraction since March 2014.
· The weakness largely reflected slack domestic and external demand and slumping output prices, although the DI for the change in input prices suggests low oil and other commodity prices continued to improve terms oftrade for a broad range of industries and offset sluggish sales to some extent. That said, the strengthening yen on top of weak demand was also a factor thatweighed on the business sentiment for export-oriented and tourism-related industries.
· Outlook for business conditions three months out remained sluggish with continued declines for all-sized industry groupings on expectations ofcontinued weakness in demand and increases in input prices, largely because of wage costs in line with labor shortage.
· Weak demand and the stronger yen led to downside revisions to the sales and current profit outlooks in fiscal year (FY) 2015, with expectation of steeper declines in sales (-1.0% y/y) and softer profits growth (4.3%) for all enterprises. Sales and current profits of all enterprises for FY2016 were expected to be held at FY2015 levels. Slack profit outlooks hit fixed investment plans for FY2016 with a contraction of 4.8% year on year for all enterprises.
IHS Global Insight views:
Corporate profits could be revised down further if the yen stays around the current level against the US dollar (around JPY112/USD1), because the average exchange-rate assumption for large enterprises was JPY117.46 for FY2016.
Weaker expectation and the likeliness of downside revisions to corporate profit outlooks could weigh on capital expenditure. Weaker corporate profits and business sentiment also suppress wage growth, although the DIs of employment conditions suggest severe labor shortages in all size enterprises (excluding large manufacturers) over the near term.
The March results are likely to make the BoJ consider additional monetary easing and push the government to introduce fiscal stimulus plans as early as possible, on top of the plans to accelerate spending budgeted funds for FY2016. Nevertheless, the historically high level of DIs for financial position and lending attitude of financial institutions suggest limited upside from the additional monetary easing. The situation should urge the government to accelerate structural reforms to support the creation of effective demand and improvements in productivity. (*)