Weakening demand at home and abroad weighed on Japanese manufacturers’ confidence in the first quarter, prompting them to cut spending plans, clouding the outlook for Prime Minister Shinzo Abe’s drive to reflate the economy. But the latest central bank survey showed service-sector firms saw business conditions improve to a nearly one-year high as they enjoyed lower oil costs and a surge in inbound tourism, underscoring the patchy nature of Japan’s recovery.
Both manufacturers and non-manufacturers expect conditions to worsen slightly in the coming three months, the closely-watched “tankan” survey showed on Wednesday. That’s a worrying sign for the Bank of Japan as it prints money aggressively in the hope of nudging companies and households to boost spending. “We can see that companies are more worried about overseas demand. At the same time, the measure of domestic demand has not improved,” said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
“The capital expenditure forecasts also raise doubts about the likelihood of achieving the BOJ’s inflation target,” he said. The headline index gauging big manufacturers’ sentiment was flat from three months ago at plus 12 in March, the survey showed, surprising markets that expected a 2-point improvement.