Japan business mood patchy on effects of weak yen

Confidence at Japanese manufacturers rose for a second straight month in March but slid among service sector firms, a Reuters poll showed, reflecting the boost given to big exporters by a weak yen and the pain suffered by other firms paying more for imports. The Reuters Tankan - which closely tracks the Bank of Japan's tankan survey - suggested that the central bank's poll due April 1 is likely to show steady improvement among big manufacturers.
But the Reuters poll also highlighted an uneven recovery from a recession caused by last year's sales tax hike. Benefits from slumping oil prices are yet to spread through resource-poor Japan.
The poll of 483 big and mid-size firms, of which 255 replied between March 3-16 was taken just as the dollar hit eight-year highs above 122 yen last week, stoking concerns that further yen depreciation could hurt firms who are unable to pass on the rising costs of imports to customers.
"Overall sentiment is moving in a positive direction," said Yuichiro Nagai, economist at Barclays Capital. "Non-manufacturers' sentiment stopped rising, partly reflecting higher costs caused by a weak yen for companies that rely on imports."
"As such, we expect the sentiment indices in the BOJ tankan to hold broadly steady."
The central bank will scrutinise the upcoming tankan at the next policy review in April, after it stuck to its massive stimulus programme at its last review on Tuesday.
The managers, who responded anonymously to the Reuters poll, said they are facing rising cost for materials and other inputs despite cheaper oil prices, and sluggish demand due to the sales tax hangover and slowing growth in China.
"A weak yen helped improve profits at our overseas business but weakening domestic demand weighs on overall sales," said one general machinery maker. Another manufacturer said: "Our business conditions deteriorated as we cannot pass on rising costs of raw materials caused by a weak yen."
The Reuters Tankan sentiment index for manufacturers rose to 16 in March from 11 in the prior month, led by gains in precision machinery makers and oil refiners. It is expected to improve further to 21 in June.
Compared with three months ago, the manufacturers' index improved by six points, suggesting that the BOJ's next quarterly tankan will show a steady improvement among big manufacturers.
The service-sector index slipped to 21 from 22 in February and it is seen slipping further to 19 over the next three months. The index stood two points lower than in December, pointing to little improvement in the upcoming BOJ tankan.