Japan manufacturers' mood weighed by yen gains, emerging market slowdown

[TOKYO] Confidence at Japanese manufacturers eased in March and is seen unlikely to change much over the next three months, a Reuters poll showed on Wednesday, in a sign that yen gains and slowing growth in China and emerging markets are hurting exporters.

Service-sector sentiment bounced from the prior month's drop, but it is seen down again in June, underscoring the fragility in private consumption, which accounts for roughly 60 per cent of the economy.

The monthly poll, which closely tracks the Bank of Japan's quarterly tankan survey, suggests the BOJ poll may show worsening of the big manufacturers' sentiment index, as the economy faces the risk of another recession.

The poll of 513 big and mid-sized Japanese companies between March 3-17, of which 259 responded, came a week after the BOJ downgraded its economic view because of sluggish exports and factory output. The central bank stood pat at last week's policy review, after adopting a negative interest rate policy in January.

"Weak external demand is the major culprit for deterioration in manufacturers' sentiment," said Yuichiro Nagai, economist at Barclays Securities. "The BOJ tankan will probably show worsening of sentiment at manufacturers and non-manufacturers. We expect the BOJ will ease again in July when it is likely to cut economic and price outlooks. A surprise action cannot be ruled out in April though."

The upcoming BOJ tankan on April 1 is among key indicators the central bank scrutinises when making monetary policy. Expectations linger that it could ease again in coming months to hit its ambitious 2 per cent price target. "Some of our clients are taking a wait-and-see stance due to yen's rise, stock falls and negative interest rates. While the government's preferential measures for investment end in March, construction is lagging due to labour shortages," a machinery producer said in the survey, which companies answer anonymously.

Many manufacturers complained about the slowdown in China and emerging markets, and rises in the yen, which hit a 17-month high below 111 versus the dollar this month.

The Reuters Tankan sentiment index for manufacturers fell to 6 in March from 7 in February, weighed by chemicals, metal products and precision machinery. It is seen at 7 in June.

Compared with three months ago, the manufacturers' index worsened by three points, suggesting the BOJ's tankan may show a deterioration in the big manufacturers' sentiment.

The service-sector index rose to 24 from 21 in February, led by retailers and information/communications. The index is seen worsening again in the next three months.

REUTERS