Japan Business Sentiment Down After Sales Tax Hike

Japanese business sentiment barely improved in the three months ending March and the corporate outlook is now considerably weaker than when Japan last raised its sales tax in 1997, the Bank of Japan’s tankan survey showed on Tuesday.

The findings highlight the daunting challenge facing Prime Minister Shinzo Abe in his quest to increase the consumption tax while simultaneously rescuing Japan from years of deflationary stagnation.

The headline index for big manufacturers’ sentiment rose by one point from three months ago to plus 17, the BOJ’s closely watched survey showed, marking the fifth straight quarter of improvement but slightly short of a median market forecast of plus 18. The rise was smaller than a 4-point gain in the previous survey in December.

Big service-sector sentiment also improved, by four points to plus 24, matching the median market forecast, as consumers rushed to beat the April 1 sales tax hike.

But crucially, both big manufacturers and non-manufacturers expect conditions to worsen in the three months ahead, the tankan showed, as they brace for a slump in spending after the tax hike that comes as exports remain sluggish.

The outlook index for big manufacturers worsened 9 points to plus 8, more than a 8-point decline when Japan previously raised the sales tax to 5 percent from 3 percent in 1997.

The outlook indices for big non-manufacturers, as well as for small manufacturers and non-manufacturers, also worsened at a faster pace than in 1997, underscoring the alarm companies feel about the potential effects of the tax hike.

Big firms expect to increase capital spending by just 0.1 percent in the new financial year starting this month, compared with a median market forecast for a 0.2 percent rise — a marked slowdown from a 3.9 percent increase in planned spending for the fiscal year that ended in March.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza