Confidence among major Japanese manufacturers improved in the last quarter after a precipitous drop in the previous three months, a Bank of Japan survey showed Wednesday, but analysts warned the economy was not yet back on track. The surprise result followed a string of weak data - including a fall in factory output and household spending - that fanned fears about the damage inflicted by an April sales tax hike.
The tax rise slammed the brakes on the world's number three economy, underscored by a sharp contraction in gross domestic product between April and June. Worries about another downturn in the three months to September have fuelled expectations the Bank of Japan (BoJ) will unveil further monetary easing measures next week.
It has also thrown into question Tokyo's plans to raise sales taxes again next year as it tries to rein in one of the world's heaviest debt burdens. On Wednesday, the BoJ's closely watched Tankan survey showed confidence among large manufacturers stood at plus 13, up one point from the previous quarter and beating market expectations for a plus 10 reading.
The survey of more than 10,000 companies - the most comprehensive indicator of how Japan Inc is dealing with the tax rise - marks the difference between the percentage of firms that are upbeat and those that see conditions as unfavourable. In another positive sign, expectations for capital spending also rose while the report suggested that the labour market was tightening. However, the reading for large companies in the non-manufacturing sector tumbled to plus 13 from plus 19 in the previous three months.
"The sharp deterioration in business conditions in the non-manufacturing sector in today's Tankan suggests that output may have shrunk yet again in the third quarter," warned Marcel Thieliant from Capital Economics. "The outlook doesn't suggest a rapid recovery, either. Large manufacturers expect conditions to remain unchanged this quarter, while large firms in the non-manufacturing sector predict a small improvement," he added.
Tsuyoshi Ueno, a senior economist at NLI Research Institute, said: "This is not a perfectly rosy picture...Big companies see economic conditions plateauing over the next three months. The latest Tankan cannot be seen as a sign of recovery yet." Business sentiment improved when Prime Minister Shinzo Abe took office in late 2012 on a pledge to kick-start the laggard economy. But the Tankan reading slumped in the three months to June, after Abe moved ahead with the sales tax hike. On Tuesday, government figures did little to alleviate fears about the recovery with factory output taking a surprise drop and household spending weakening again.
Ueno said he expected Abe to press on with lifting sales taxes to 10 percent next year - they rose to eight percent from five percent in April - noting that the conservative premier has publicly pledged to tackle the debt mountain. "The Japanese economy is still on the path of recovery although it is very slow," he added. "The government will likely go ahead with another tax hike next year, while taking measures to stimulate the economy... It wouldn't be a popular decision, but (Abe's) government will have to do it anyway."
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