Sentiment levels for large Japanese manufacturers held steady in the December quarter, bucking expectations of a slowdown.
According to the latest Tankan survey released by the Bank of Japan, sentiment levels among large manufacturers held steady at +12, beating expectations for a decline to +11. A reading above zero indicates that more firms are optimistic than pessimistic.
Firms reported that they expect profits to increase 3.3% in the 2015/16 fiscal year, down slightly on the 3.8% increase offered in the September quarter. Despite the expected deceleration in profit growth, firms upped their average USD/JPY rate for the current fiscal year to 119.4 from 117.39 seen previously.
The profitability of Japanese manufacturing firms is heavily influenced by movements in the Japanese yen, both for price competitiveness and input costs.
Adding to the upside surprise seen during the quarter, sentiment levels among large non-manufacturing firms held steady at +25. The reading, above the +23 level expected, was the equal highest level seen since the fourth quarter of 1991.
While current sentiment levels were surprisingly resilient, expectations for the future weakened fractionally. The outlook offered by large manufacturing firms slid to +7 from +10 in the September quarter – the weakest level since the March quarter of 2013 – while that for large non-manufacturing firms fell to +18 from +19, below the increase to +21 expected.
Despite the slip in sentiment towards the outlook, capital expenditure plans – both for large manufacturers and non-manufacturers – remained robust with firms indicating that they expect to increase investment spending by 10.8% in the 12 months ahead.
Although readings on profitability and capital expenditure remained firm, the survey’s employment index continued to weaken, falling to -19 from -16 three months earlier.
Last week Japan’s government released revised GDP growth figures which revealed the economy grew by 0.3% during the September quarter, leaving the annual pace of growth at 1.0%.
Along with increased household consumption, the government is looking for business investment to accelerate in the quarter ahead, helping to underpin modest levels of expected economic growth.
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