Business confidence among major Japanese manufacturers worsened for the fifth straight quarter in March to its lowest level in over two years, dampened by higher raw material costs and the prospect of slowing global economic growth, the Bank of Japan said Monday.
The reading of the key index measuring confidence among companies such as those in the auto and electronics sectors fell to 1 from 7 in December. It was weaker than the average market forecast of 3 in a Kyodo News survey and the lowest since minus 10 in December 2020.
The index for large nonmanufacturers, including the service sector, rose to 20 from 19 in the previous survey, a level last seen before the COVID-19 pandemic. It improved for the fourth straight quarter, helped by the lifting of antivirus curbs and a recovery of inbound tourism.
The Tankan index represents the percentage of companies reporting favorable conditions minus the percentage reporting unfavorable ones.
Higher raw material costs are weighing on sectors that are heavily reliant on them. Confidence among firms dealing with oil and coal products, paper and pulp, as well as food all deteriorated as they remained pessimistic.
"Manufacturers' sentiment was weak due to slowing exports and the emergence of financial concerns. Much depends on whether banking woes will deepen or ease," said Yuichi Kodama, chief economist at the Meiji Yasuda Research Institute.
Automakers, which have been negotiating semiconductor shortages that led to production cuts, were still pessimistic despite a recovery.
Japan's economy likely expanded in the January-March quarter as pent-up demand for services lent support despite accelerating inflation denting consumer sentiment.
Still, concerns that aggressive monetary tightening will slow growth were compounded by banking woes following the collapse of two regional banks in the United States and Credit Suisse's rescue by rival Swiss lender UBS.
In the months ahead, manufacturers' confidence is expected to improve slightly to 3 from 1 while sentiment among nonmanufacturers is forecast to drop to 15 from 20.
The quarterly survey pointed to a positive stance on capital investment, a key driver of the economy. Companies are planning to increase capital spending by 3.9 percent in the business year starting April from the previous year.
Many firms tend to be conservative about their business plans at the start of a new fiscal year. The relatively strong appetite for investment reflects the fact that many firms are planning to catch up on spending previously postponed to curb fixed costs, a BOJ official said.
Rising raw material costs are already being passed on by a growing number of companies, with consumer price inflation well above the central bank's 2 percent target.
Japanese firms expect inflation to reach a record 2.8 percent a year from now, and stay above the BOJ's target even three years and five years ahead.
The outlook stands in contrast to the central bank's view that the inflation rate will undershoot the target in fiscal 2023 and that its ultralow rate policy should remain in place.
"The BOJ will have to be cautious about normalizing its monetary policy because overall confidence is not strong," said Toru Suehiro, chief economist at Daiwa Securities Co.
The assumed exchange rate for the dollar-yen pair is 131.72 yen for fiscal 2023 from April, compared with 130.65 yen for the just-ended business year. The U.S. dollar was trading around the 133 yen line on Monday, with the Federal Reserve involved in a delicate balancing act between fighting inflation with rate hikes and ensuring financial stability amid banking concerns.
The euro is expected to trade at 138.29 yen, higher than 137.38 yen.
The BOJ surveyed 9,199 companies, of which 99.2 percent responded between Feb. 27 and Friday.
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