Japan factory sentiment worsens in Q4, services improve - Tankan

By Ambar Warrick

Investing.com-- Sentiment among major Japanese manufacturers grew worse in the fourth quarter amid rising cost pressures, a survey by the Bank of Japan showed on Wednesday, although the lifting of COVID-19 restrictions boosted sentiment in the services industry.

The Bank of Japan’s Tankan Large Manufacturers Index read 7 in the three months to December, slightly better than expectations for a reading of 6 but below last quarter’s reading of 8.

While sentiment remained in positive territory, it was also the index’s worst reading since March 2021, as local manufacturers continued to grapple with rising costs. An index gauging the outlook for the sector also worsened to 6 in the fourth quarter from 9.

Sentiment among petroleum and coal industries worsened the most during the quarter, as did pulp and paper industries.

This also saw capital expenditure slip further during the quarter, with growth in the Tankan All Big Industry CAPEX index falling to 19.2% from 21.5% in the prior quarter.

Still, sentiment among makers of industrial machinery remained robust, as they saw steady export demand during the quarter.

Japan’s manufacturing sector has been hit hard by rising inflation and a weakening yen this year, both of which ramped up input costs. While most manufacturers passed these costs onto customers, this also dented sales.

Industrial production data for October, due later in the day, is also expected to show a sustained decline. Data released earlier this week showed that Japanese producer price inflation remained near a 40-year high in November.

But sentiment in Japan’s non-manufacturing sector fared far better in the fourth quarter, as the lifting of most COVID-19 restrictions spurred a sharp recovery in demand for transport, restaurants, and services for individuals.

The Tankan Large Non-Manufacturers Index jumped to 19 in the fourth quarter, blowing past expectations of 17 and the prior quarter’s reading of 14.

A COVID reopening helped boost the Japanese economy earlier this year by reviving tourism and also driving a recovery in local consumption.

But this recovery now appears to be running out of steam, with retail sales in the country entering a steady downward trend in recent months.

The Japanese economy also unexpectedly shrank in the third quarter, with few prospects for recovery in the fourth quarter.