Sentiment among Japan’s largest manufacturing firms fell to a three-year low during the March quarter, dragged lower by concerns surrounding profitability due to the strengthening Japanese yen.
According to the closely watched Tankan survey released by the Bank of Japan, the index measuring sentiment levels for large manufacturers fell to +6 during the quarter.
Not only did it miss expectations for a decline to +8, it was also the lowest level seen since the June quarter 2013.
Looking ahead, firms were even more pessimistic, with the separate June outlook index dropping to +3 from +7 in Q4 2015.
The Tankan survey is derived by taking the number of firms who are optimistic, and subtracting the number who are pessimistic in order to calculate a net balance.
So at +6 it still suggests optimists outnumber pessimists.
An official at the Bank of Japan stated that a slowdown in emerging markets was likely behind the weaker sentiment reading.
Mirroring the deterioration in manufacturing sentiment, that expressed by non-manufacturing firms also softened.
The survey’s index of larger non-manufacturers fell to +22 from +25 in Q4 2015, signalling less firms are optimistic about the business outlook.
Like the manufacturing index, it missed forecasts for a drop to +24 and was the lowest level seen since the March quarter 2015.
Looking ahead to the June quarter, sentiment weakened further, dropping to +17 from +18 seen previously.
Indicative of the drop in sentiment, and creating issues for the Abe government which is looking for business investment to help spur on economic growth, expectations for capital expenditure from large firms fell heavily.
In the 2016/17 financial year, firms indicated that they would reduce spending by 0.9%, down on the 0.7% drop expected and the previous year’s increase of 10.8%.
The assumption was based around the Japanese yen averaging 117.39 against the US dollar in the fiscal year ahead, up from its present level of around 112.
The Bank of Japan stated firms were forgoing capital expenditure due to global economic uncertainty, but suggested there was no sign spending was losing momentum.
The disappointing report — following a raft of other weak data — has seen the chance of additional monetary policy easing from the Bank of Japan increase in the eyes of some analysts.
“This data confirmed the very cautious stance of Japanese firms reflecting the market volatility since January. There’s no signs of corporate sentiment bottoming in coming months,” Mari Iwashita, chief market economist at SMBC Friend Securities, told Reuters.
“There’s more than a 50 per cent chance the BOJ will consider easing policy further this month.”
Even with the increased chance of additional stimulus arriving later this month, Japanese stocks have endured a torrid start to the new trading quarter.
Midway through the session, the benchmark Nikkei 225 is down 2.81% at 16,288.
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