Positive Shift in Japan's Business Sentiment Amid Global Uncertainties

09 Nov, 2023

Positive Shift in Japan's Business Sentiment Amid Global Uncertainties

Japanese manufacturers experienced a welcome uptick in business confidence, marking the first positive shift since August, as indicated by the Reuters Tankan poll. The service-sector mood also witnessed a second consecutive monthly improvement, echoing trends seen in the Bank of Japan's quarterly tankan survey for Q3. However, the overall outlook remains challenging, reflecting uncertainties in the global economic recovery.

While the November poll hinted at improved confidence, it also forewarned of a tough quarter ahead. Manufacturers anticipate a steady mood over the next three months, contrasting with the service sector, where morale is expected to decline.

The Reuters Tankan surveyed 502 large- and mid-sized companies, with half responding anonymously. Companies expressed concerns about rising import costs of raw materials and the deteriorating conditions in key markets, such as China. The impact of a weakened Japanese yen on import costs, coupled with slow global growth and geopolitical tensions affecting commodity prices, continues to challenge the broader economy.

The sentiment index for manufacturers rose to plus 6, a two-point increase from the previous month, with notable contributions from the automobile and food processing sectors. However, the index is anticipated to plateau in February.

In the service sector, the index climbed to plus 27 from plus 24 in the previous month, driven by retailers, information and communications, and other services. Nevertheless, a projected dip to plus 21 over the next three months raises concerns about domestic consumption, which has yet to rebound despite the easing of COVID restrictions earlier this year.

Recent data revealed a seven-month decline in consumer spending in September, indicating a prolonged recovery period for household consumption. Analysts anticipate a contraction in Japan's economy, the world's third-largest, in the third quarter, marking the first downturn in four quarters, according to a Reuters poll.

The Reuters Tankan indexes, calculated by subtracting the percentage of pessimistic respondents from optimistic ones, underscore the delicate balance between positive shifts in sentiment and persistent global challenges.