Japan Manufacturer Sentiment:

 Article Source: https://mainichi.jp/english/articles/20221003/p2g/00m/0bu/011000c

Article:

TOKYO (Kyodo) -- Sentiment among major Japanese manufacturers unexpectedly worsened for the third straight quarter in the Bank of Japan's September survey released Monday, as higher raw material costs, magnified by a sharp drop in the yen, threatened to squeeze their profits despite an easing of COVID-19 supply bottlenecks.

The reading of the key index measuring confidence among companies such as those in the auto and electronics sectors fell to 8 in September from 9 three months earlier, according to the BOJ's Tankan survey. The average market forecast was for an improvement to 11 in a Kyodo News survey.

The mood among nonmanufacturers, meanwhile, improved slightly to 14 from 13 in the previous survey, up for the second straight quarter, as economic activity picked up pace with the removal of anti-coronavirus curbs.

Ideas:

Its not a surprise that Japanese manufacturers are not feeling very good right now. But at the same it shouldn't be a surprise as conditions haven't really improve over the past year.

While energy and raw material prices have continued to increase the weak yen of course has made it much more difficult for many companies to plan any kind of strategies to overcome the situation as the yen keeps weakening.

Most likely all a company can do is plan for less than desirable sales and or less than desirable profits in the near future.

If they company has stockholders, they might not like it but there is nothing a people can do about the business conditions.

There can only be so much cost cutting in a company and companies maybe just have to ride out the not so good conditions.

Article:

The Tankan index represents the percentage of companies reporting favorable conditions minus the percentage reporting unfavorable ones.

As Russia's war against Ukraine drags on, higher energy and raw material costs have cast a pall over the economic outlook, prompting companies to pass on increased costs to protect their profits.

The yen has plunged against the U.S. dollar, reflecting the widening interest rate differential between Japan and the United States as inflation has been accelerating at different speeds.

"On balance, the data show the economy lacks vigor," said Shinichiro Kobayashi, a senior economist at Mitsubishi UFJ Research and Consulting Co.

Ideas:

Companies can pass on only so much of their increased costs over time, as whomever is next in the supply chain either companies or the final consumer when eventually say enough is enough and look for substitutes or if possible stop buying all together.

Japanese companies are all too aware consumers very price conscious and or resist any kind of prices increases if they can help it.

Buy eventually Japanese consumers and other Japanese companies might to realize that prices increases are not a part of Japanese society and can't be avoided.

Unfortunately the Japanese economy has lacked real vigor for a very long time. The major reason is that companies haven't increased wages for many years.

As a result consumer spending has never reached the level of other advanced countries. When there isn't a significant level of consumer spending in an economy there is less rigor overall in the economy.

At the same time with consumer spending comes more sentiment in the economy which means the potential for more business investment and spending in the economy.

Article:

"The economy has emerged from the COVID-19 fallout, but there are negative factors weighing on sentiment such as rising prices, monetary tightening and the prospect of a global economic slowdown," Kobayashi said.

Companies in the survey expect the dollar to trade at 125.71 yen on average in the current business year to March, up sharply from 118.96 yen in the previous survey.

Japan carried out a currency intervention in September to arrest the yen's rapid depreciation and the dollar was trading near the 145 yen line on Monday.

Ideas:

If companies are expecting a yen rate of 125, they might have to wait a while as the rate reached 145 recently. That is a long way from 125.

The weak yen has positives and negatives for the Japanese economy as exporters can benefit from the weak yen with better revenue overseas but also suffer with increased material and energy costs in Japan.

So whatever they gain overseas they might lose because of higher costs in Japan, so the positives could be very negligible at the present time.

Whatever the BOJ has done to limit the increase in the yen weakening against the US dollar doesn't seem to have worked just yet.

Article:

"The weaker yen is positive for automakers and machinery makers but there are many firms that have not been able to pass on higher costs, driven by the weaker yen," Kobayashi said.

The BOJ has maintained its ultralow rate policy to support the economy, still in the midst of recovering from the COVID-19 malaise, but its persistently dovish stance has led to a relentless drop in the yen, boosting import costs for the resource-poor nation.

Reflecting the current cost-driven inflation, companies in the survey expect a 2 percent year-on-year rise in prices five years later, hitting the BOJ's target, for the first time.

Ideas:

At some point the Bank of Japan might have to realize it can't keep its low rate for the good of society and the overall economy.

For a very long time Japanese companies were unwilling or to pass on their costs and or were able to absorb the costs.

One reason why they've been able to absorb their costs for so long it that they haven't increased wages which means they have kept their costs within a manageable range but of course that was before the surge in material and energy cost increases.

But most likely now many companies are unable to keep their cost within a manageable range and now have to pass on some or all of their costs.

Article: 

The Japanese central bank, however, expects the core consumer price index, excluding volatile fresh food items, to undershoot its target in both fiscal 2023 and 2024.

"It's worth noting that the price outlook reached 2 percent. What is more important is whether inflation expectations will continue to improve from the next fiscal year onward as robust wage growth is a prerequisite for a policy change (by the BOJ)," said Toru Suehiro, a senior economist at Daiwa Securities.

The data showed major companies were increasingly raising retail prices to reflect higher input costs, though many companies were still struggling to pass on such costs.

Ideas:

Just what does "undershoot" exactly mean? If it means inflation has not reached the BOJ target of 2 percent than that is correct, in terms that inflation is not related to consumer demand or consumer spending but producer price increases which is much different.

Its hard to see if conditions will improve next year as 2023 is expected to be a recession year.

As such robust wage growth, again, might not happen or won't be enough to have any significant effect on the Japanese economy.

Japanese companies will probably continue to struggle passing on costs and those in the supply chain and especially the final consume are very reluctant to accept prices increases.

Article:

The index of sales prices in the manufacturing sector rose to 36, its highest reading since 1980, while its equivalent figure for input costs stood at 65, also the highest level since the same year.

The easing of supply bottlenecks caused by the pandemic has helped automakers, which were forced to curb output. But sentiment among sectors relying on imports of food, lumber, paper and nonferrous metals, worsened.

The hotel and restaurant industry was less pessimistic than before, with sentiment improving to minus 28, but it still lagged behind other nonmanufacturing sectors.

Ideas:

The increase in prices in Japan would not be a major concern in wage increases were able to match the prices in the manufacturing sector and imports costs and in that way the overall level of costs and wages would be equal or somewhat equal.

But an economy never works that way as there are always positives and negatives at the same time, as seen some sectors are seeing worsened sentiment and some sectors are seeing improved sentiment.

The hotel and restaurant sector probably has a long way to go before gets back to the 2019 pre-pandemic, as for example its hard to expect 32 million international visitors to Japan to just come back immediately as airline prices and airline delays etc are here for a while.

Article:

While Japan's economy likely grew in the July-September quarter, economists expect it did so at a slower pace than the annualized real rate of 3.5 percent in April-June.

Sentiment among big manufacturers is expected to improve slightly to 9 over the coming months and the mood among nonmanufacturers will likely drop to 11, the data showed, weighed down by higher input costs.

Ideas:

No one should really expect robust growth in Japan for a while and there are just too many variables constraining the economy.

There might be some modest growth, if that, but that is all anyone should expect.

Import costs, energy costs, material costs and the weak yen might be too much for the Japanese economy to overcome at this time.

And as such as consumers feel the increase in prices they are going to spend less and less overtime, which then means less business spending and investment which their profits and sales are less overtime.

Article:

Japanese companies, both manufacturers and nonmanufacturers, are planning to step up capital investment in fiscal 2022 by 16.4 percent from a year earlier, revised upward from 14.1 percent in the previous survey. The increase was the largest on record at the end of September.

The BOJ surveyed 9,268 companies, of which 99.5 percent responded between Aug. 29 and Friday.

Ideas:

It must be remembered that probably in 2020 and 2021 business investment might not have been that much as a such a 16.4 percent increase might not really be that much as companies are just making up for less investments in the previous years.

But any kind of investment might indicate some companies are feeling somewhat good and might feel its the right time to get back into the game.

Maybe some companies, even though the conditions might not be the best they have no choice and need to get their capital investments up and running again, and for some maybe after two years of waiting.

Have a nice day and be safe!