Japanese business sentiment hits two-year high

Sentiment among large Japanese manufacturers has risen to its strongest level since the final quarter of 2018 as the global economy rebounds from the coronavirus pandemic.

The Bank of Japan’s Tankan index rose from plus 5 to plus 14 in the second quarter of the year, slightly below analyst expectations of plus 15, signalling a robust expansion in output.

But sentiment in the services sector was disappointing, with the index rising from minus 1 to plus 1 as Japan experienced a wave of Covid-19 cases that triggered a state of emergency in large cities.

The readings on the Tankan, widely regarded as Japan’s most reliable economic data series, suggested that Asia’s only G7 economy was well-positioned for growth in the second half of the year.

Tom Learmouth, Japan economist at Capital Economics, a consultancy, said the Tankan suggested a weak start to the year would soon give way to a strong recovery. He forecast Japanese output would return to pre-virus levels by the end of the year.

John Vail, chief global strategist at Nikko Asset Management, said the index pointed to a robust outlook. “The Tankan for large manufacturers showed current conditions surged to well above their long-term average and not far from decade highs,” he said.

The Tankan is a business sentiment survey, similar to a purchasing managers’ index, but it is unusually broad, with coverage of almost 10,000 companies and a response rate of more than 99 per cent.

Among other questions, companies are asked whether business conditions are “favourable” or “unfavourable”. The latter is subtracted from the former to give an index that can range from minus 100 to plus 100, with readings above zero suggesting positive business conditions.

Conditions were especially strong in industries that supply capital equipment to Chinese manufacturers. The index for production machinery came in at plus 26 and for electrical machinery at plus 28.

But Japan’s mainstay automotive industry fell back from plus 10 to plus 3, likely reflecting the impact of semiconductor shortages on output.

Service sectors hit by the state of emergency remained in the doldrums, with the index for hotels and restaurants at minus 74 for and transportation at minus 10. Under restrictions that were only lifted in mid-June, restaurants were asked to not serve alcohol and to close at 8pm.

Businesses forecast a 9.6 per cent increase in capital spending this year, suggesting business investment will boost overall output growth, while companies reported a modest increase in labour shortages.

Economists widely expect growth to accelerate through the remainder of 2021 as Japan’s Covid-19 vaccination campaign gathers pace. The country is inoculating about 1 per cent of the population every day, and 23 per cent of the public has received at least one dose.