Service sector

The mood of the service sector is improving | The star

TOKYO: Japan’s service sector sentiment improved to a two-year high, but manufacturers’ recovery has stalled, according to a closely watched central bank survey – a sign that rising material costs raw weighed on the recovery of the economy after the pandemic.

Major companies expect conditions to deteriorate going forward as high fuel prices and a weak yen drive up import costs, bolstering expectations that Japan will maintain massive fiscal and monetary support to support a fragile economy.

“Non-manufacturer sentiment has been boosted since the end of pandemic curbs, while supply constraints have hit manufacturers,” said Toru Suehiro, analyst at Daiwa Securities.

“Overall, business confidence lacks strength, with manufacturers and non-manufacturers expecting conditions to worsen,” he said.

The headline index measuring the sentiment of major manufacturers came in at plus 18 in the last quarter of 2021, unchanged from the previous quarter and below market forecasts of plus 19, the Bank of Dusseldorf’s tankan survey showed yesterday. Japan (BoJ).

Rising costs and disruptions to car production have hit industries such as non-ferrous metals, chemicals and machinery, he showed.

In contrast, sentiment in large non-manufacturers improved for the sixth consecutive quarter to plus nine, from plus two in September and beating market forecasts of plus six.

The index hit its highest level since December 2019 as the lifting of the state of emergency on September 30 to combat the Covid-19 pandemic lifted retailer spirits.

But the survey, conducted for a month until December 10, likely didn’t capture much of the recent spread of the Omicron variant, with nearly 80% of responses received by November 29.

Rising raw material costs are adding to uncertainty by reducing profits for companies just emerging from the pandemic.

An index measuring the output prices of major manufacturers rose to levels not seen in 1980, although the input price gauge was also at its highest level since 2008, the survey showed, a sign that companies may find it difficult to increase prices as much as necessary to cover costs.

Businesses expect inflation to hit 1.1 percent a year from now, the tankan showed, marking the highest level since September 2015.

Despite the bleak outlook, companies plan to increase hiring and capital spending to address a chronic labor shortage.

Large companies expect to increase capital spending by 9.3% in the year ending March 2022, less than the market forecast for a 9.8% gain but rebounding from an 8% decline, 3% the previous year.

The tankan also showed corporate funding continued to ease, giving the BoJ room to phase out emergency support deployed last year to combat a pandemic-induced credit crunch.

Japan lagged behind other countries in staging a strong rebound from last year’s pandemic, shrinking 3.6% annualized in July-September on weak consumption and hit production by a spike in infections and supply constraints.

While analysts expect growth to rebound in the last quarter of this year, some warn that the emergence of Omicron is clouding the outlook and could keep the recovery weak next year.

Separate data showed Japan’s basic machinery orders rose in October for the first time in three months as service-sector companies ramped up investment amid low Covid-19 infections, a welcome sign that businesses were spending and the broader economy was recovering.

The world’s third-largest economy is expected to post a strong rebound this quarter after a bigger-than-expected contraction in July-September, although the outlook is currently clouded by uncertainties surrounding the new variant of the Omicron coronavirus.

Basic machinery orders, a highly volatile leading indicator of capital spending over the next six to nine months, rose 3.8% in October from the previous month, Cabinet Office data showed yesterday.

That compares with a 2.1% expansion predicted by economists in a Reuters poll and followed no change in September.

Core orders for businesses in the services sector excluding ships and electric utilities rose 16.5% month-on-month in October, led by transportation and postal services which increased by 170.1% due to large-scale rail vehicle orders.

“As the coronavirus outbreak has subsided, capital spending by a wide range of non-manufacturers has increased,” a government official told reporters.

Meanwhile, manufacturers’ orders fell 15.4% from the previous month, as lower demand from chemical companies offset growth from semiconductor manufacturing equipment and production machinery companies.

On a yearly basis, base orders rose 2.9% in October, the data showed, versus a 4.0% rise expected by economists.

Business capital spending slowed in the third quarter due to a global resurgence of the Covid-19 outbreak, which particularly hit automakers and other builders dependent on parts supplies from Asian factories.

While supply bottlenecks eased, the outlook for production and spending remained gloomy.

The central bank is expected in this week’s policy review to debate whether to extend pandemic relief programs beyond their current March 2022 deadline, though no change to its policy ultra-flexible monetary policy is expected. —Reuters