Corporates To Remain Conservative Despite Better Conditions

BMI View: Although the Bank of Japan's (BoJ) Tankan survey in December recorded an increase in firms experiencing positive business conditions, few believed that these improvements will persist into the next quarter. This pessimistic outlook remains a key obstacle that Prime Minister Shinzo Abe is battling against, as corporate Japan once again revised down its projected capital expenditure for fiscal year 2013. This further suggests that an increment to workers' base wages is highly unlikely despite the Abe administration's numerous pleas to the business community, with a possibility of private consumption contracting in 2014 as the consumption tax hike is implemented.

Results from the Bank of Japan's (BoJ) quarterly Tankan survey for December revealed that, on the whole, a greater proportion of Japanese firms expect the pace of improvements in business conditions to taper off compared to the number which see better conditions materialising in Q313. With businesses consistently forecasting conditions below actual conditions experienced (see graph below), this highlights the conservative stance that has persisted among businesses despite the implementation of major fiscal and monetary stimulus, reflecting the difficulties that Abe is up against as he tries to revive the economy.

Corporate Japan Not Convinced

More Firms Forecasting A Less Positive Outlook
Japan - Tankan Survey, Diffusion Index Of Firms With Favourable Versus Unfavourable Outlook, pp

BMI View: Although the Bank of Japan's (BoJ) Tankan survey in December recorded an increase in firms experiencing positive business conditions, few believed that these improvements will persist into the next quarter. This pessimistic outlook remains a key obstacle that Prime Minister Shinzo Abe is battling against, as corporate Japan once again revised down its projected capital expenditure for fiscal year 2013. This further suggests that an increment to workers' base wages is highly unlikely despite the Abe administration's numerous pleas to the business community, with a possibility of private consumption contracting in 2014 as the consumption tax hike is implemented.

Results from the Bank of Japan's (BoJ) quarterly Tankan survey for December revealed that, on the whole, a greater proportion of Japanese firms expect the pace of improvements in business conditions to taper off compared to the number which see better conditions materialising in Q313. With businesses consistently forecasting conditions below actual conditions experienced (see graph below), this highlights the conservative stance that has persisted among businesses despite the implementation of major fiscal and monetary stimulus, reflecting the difficulties that Abe is up against as he tries to revive the economy.

More Firms Forecasting A Less Positive Outlook
Japan - Tankan Survey, Diffusion Index Of Firms With Favourable Versus Unfavourable Outlook, pp

Corporate Japan Not Convinced

Abe's policies have yet to cause a decisive shift to the outlook of corporate Japan, which remains content to wait and see for evidence of a lasting rebound before hiring and spending. Indeed, this defensive stance of businesses was exemplified in the further downward revision of forecasted capital expenditure growth for fiscal year 2013, which came in at 4.6% year-on-year (y-o-y) in December's survey versus 5.1% y-o-y in the prior quarter. This coincides with the recent downward revision of Q313 GDP growth estimates to 1.1% quarter-on-quarter (q-o-q) annualised after adjusting for seasonal effects (versus previous estimates of a pace of 1.9%), which marked a significant slowdown from an annualised pace of 3.5% q-o-q recorded in Q213. In our opinion, despite the long list of bills tabled by Abe's Liberal Democratic Party, the lack of reform to structural rigidities in the economy (such as the ease of firing workers and opening up certain industries to foreign competition) continue to sap business confidence, as politicians and lobby groups seem to remain reluctant to fully support Abe's third arrow (economic liberalisation and revitalisation), encumbered by their own interests.

Ready To Head Into Negative Territory?
Japan - Seasonally-Adjusted Private Consumption Growth Annualised, % chg q-o-q

Private Consumption Could Possibly Contract In 2014

Businesses' confidence in the resilience of current improvements suggests that economic growth is likely to slow down in 2014, which we expect to force authorities to once again push its fiscal and monetary levers, although we believe these efforts will fail to re-create the boost to growth we saw in 2013. With the cost of food and energy on the rise, eroding household incomes while few companies commit to raising base wage rates, consumers could be forced to save more, rather than adding to the virtuous cycle of spending that Abe had hoped with the arrival of inflation. Indeed, we expect the pace of growth in private consumption to continue in its downward trajectory, and even fall into contraction in Q214, given that the consumption tax hike to 8% from the current 5% is set to be implemented in April 2014. Given our expectations for businesses to remain conservative with their spending, we expect overall domestic demand to expand at almost half the pace in 2014, projecting growth of 1.3% compared to 2.4% in 2013.

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Sector: Country Risk
Geography: Japan
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