Japanese business sentiment rebounds despite Covid-19 woes

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Japanese business sentiment rebounded in the first quarter of 2021 despite a renewed Covid-19 state of emergency, suggesting Asia’s largest advanced economy will stage a quick recovery from the pandemic.

The Bank of Japan’s Tankan index for large manufacturers rose 15 points to a reading of plus 5, well ahead of analyst expectations that it would remain in negative territory at minus 2.

The optimistic sentiment at Japan’s industrial companies suggested that the global vaccine rollout, robust growth in China and the prospect of a large US stimulus were improving the business environment for exporters.

The positive outlook was particularly striking given that Japan’s biggest cities have been partially locked down since mid-January, with office staff asked to work from home and restaurants closed at 8pm.

The quarterly Tankan index is regarded as one of Japan’s best economic indicators and the Bank of Japan watches it closely to track the business cycle. The survey covers almost 10,000 companies with a 99 per cent response rate.

Companies were asked whether business conditions were favourable or unfavourable, with the latter measure is subtracted from the former. That results in an index that can range from minus 100 to plus 100, with readings above 0 suggesting positive business conditions.

Japanese companies were less exuberant than their US counterparts and more in line with European peers, said John Vail, chief global strategist at Nikko Asset Management. “Both Japan and Europe had headwinds through March,” he said.

“Improvements should be rapid in the coming quarters, although somewhat hamstrung by automobile semiconductor shortages,” he added.

A fire last month at a Renesas Electronics factory north of Tokyo has deepened a global shortage of chips that is hampering automobile production.

Cyclical industries reported a strong rebound, with sentiment in the petroleum sector rising from minus 19 to plus 19, iron and steel increasing from minus 25 to minus 5 and chemicals flipping from minus 5 to plus 5. The crucial automotive sector reported sentiment up from minus 13 to plus 10, while production machinery — which exports heavily to China — jumped from minus 21 to plus 8.

Recovery in the services sector was more subdued, with overall sentiment rising from minus 5 to minus 1. Construction and business services reported strong figures but the renewed state of emergency hit hotels and restaurants, where sentiment was down from minus 66 to minus 81.

Companies forecast a 3 per cent increase in investment this year and an exchange rate of about ¥106 against the dollar, compared with a current rate above ¥110. A weaker currency and robust investment plans were both expected to boost the economy later in the year.

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