tankan

Light on the horizon? Economists see a Bank of Japan quarterly survey showing optimism about the economy despite a sales tax increase in April that many feared would upset Japans economic recovery. Bloomberg News

The Bank of Japans coming corporate survey for June is likely to show robust business sentiment and more aggressive capital investment plans for the future, economists say, adding to hopes that the economy is already shaking off the hangover from a recent sales tax increase.

The BOJs tankan survey of over 10,000 companies, a quarterly poll due next Tuesday, will be the most comprehensive indicator yet of how corporate Japan feels about the headwinds generated by the increase in the national sales tax rate to 8% from 5% on April 1.

Businesses are becoming an increasingly crucial player for the success of Prime Minister Shinzo Abes economic-revival plan, as households tighten their belts following the rise in the tax, while exports remain lackluster and government spending moderates.

The closely watched diffusion index gauging the mood among big manufacturers likely slipped just one point from March to 16, according to a median forecast of 16 economists polled by The Wall Street Journal. The economists also see the index for large non-manufacturers dropping four points to 20. The indexes are calculated by subtracting the percentage of firms saying business conditions are bad from those saying they are good. A pullback in demand following the tax increase likely hit sentiment among auto makers, steel producers and retailers, among others.

While both headline indexes are seen falling, economists say theres nothing to get too alarmed about. Optimistic business managers will still clearly outnumber the pessimists. Economists also note that if the index results do match expectations, that shows that company sentiment is about as buoyant as it was in December, when Tokyo stock markets were flirting with six-year highs.

The coming tankan is very likely to underscore the solid footing of corporate sentiment, particularly among large corporations, said Yasunari Ueno, chief market economist at Mizuho Securities.

Economists also see forward-looking indexes for both large manufacturers and non-manufacturers signaling an optimistic view that business conditions will get better rather than worse over the coming three months. They tip the outlook index for manufacturers to hit 18 compared with the expected figure of 16 for current business conditions, with the non-manufacturers outlook index showing a similar increase to 22.

That reflects a view that the strength of a pullback in demand has already passed its peak in the immediate aftermath of the tax increase, said Takeshi Ueno, a senior economist at NLI Research Institute.

Another cause for mild optimism is an expected ramping up of big companies investment plans for the ongoing fiscal year ending in March. While the planned capital expenditure figure in the tankan survey tends to rise as the year goes along, the 6.0% increase forecast by economists would be the highest in two years for a June survey, a predicted outcome that would defy the notion of pessimism over the economy following the tax increment.

Still, some economists warn against too much optimism at this early stage. Ryutaro Kono, chief economist at BNP Paribas. said manufacturers are simply replacing their outdated equipment and it is wrong to expect a strong expansion in their investment ahead.

Most firms are still cautious about beefing up production capacity at home, owing to long-term domestic issues such as a population decline, Mr. Kono said. Even if they reinforced their equipment to boost output, they would have difficulties finding workers to operate it, he added.

Beware the June survey, says Takeshi Yamaguchi, a senior economist at Morgan Stanley MUFG Securities. He says uncertainties lie on the horizon for business sentiment, pointing to what happened after the previous two-percentage point increase in the sales tax in April 1997. After the mood among big manufacturers slightly improved in the June survey of that year on strong exports, it rapidly deteriorated in the following quarters as Japan entered a recession under the weight of the higher tax, a financial crisis in Asia and banking troubles at home.

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