Japan Corporations Remain In Contraction
For years, the Inada family of Ikebukuro has been in the steadiest of industries: sculpting tombstones imported from China. And in recent months, business has picked up.
Customers are placing orders two or three months in advance, which is unusual, while more are choosing monuments costing three times the 1m ($11,000) average.
This is probably "Abenomics" in action, says director Nobuko Inada, refering to the reflationary push from Japan's new prime minister that has caused the yen to sink against every currency bar the Venezuelan bolivar and the Malawian kwacha, while pushing stock and property prices higher.
"The cheaper yen makes companies more profitable, and that affects people's minds," she says.
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Other businesses tell a similar story. Bugaboo Japan, which began importing upscale baby buggies from the Netherlands last year, says it is off to a strong start. At Primo Japan, which sells bridal jewellery from 58 stores around the country, the high-end Lazare range has been doing "very, very well", according to director Kenneth Albolote.
But for companies not relying on irregular splurges from relatively affluent consumers, the outlook is more mixed. The latest Tankan survey from the Bank of Japan, which provides a quarterly snapshot of business conditions at more than 10,000 companies of all sizes all over the country, shows that pessimism continues to prevail.
The headline index for all enterprises across all industries stood at minus 8, only marginally better than the minus 9 recorded in December. That index has not been in positive territory – meaning that more people say business conditions are good than bad – since a two-and-half-year run ended in December 2007.
Since then, the world's third-largest economy has suffered stop-start growth and persistent deflation, with many companies struggling to rebound from the impact of the Lehman crisis and the March 2011 earthquake and tsunami.
"Corporate managers are not as upbeat as financial markets indicated," says Masamichi Adachi, senior economist at JPMorgan in Tokyo, noting that the Tankan numbers are consistent with disappointing trade, industrial production and inflation data in recent weeks.
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There are some bright spots. The "diffusion index" for large carmakers, for example, improved from minus 9 to plus 10, reflecting the sharp fall in the yen which makes Japan's exports more competitive, and overseas profits worth more when repatriated.
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That helped to lift the headline measure of confidence among large manufacturers from minus 12 to minus 8, marking the first rise in three quarters. That index is expected to rise further, to minus 1, by the next survey in June.
Some smaller exporters are also benefiting. Shinichi Koda, president of Tottori-based Oho Trading, which ships second-hand tractors and combine harvesters to eastern Europe and southeast Asia, says orders have accelerated as the yen has tumbled from 79 to the US dollar in mid-November to about 94 now.
The company, which has 30 employees, plans to hire more people and open its first overseas office by the end of the year.
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"The current situation is totally different from the time when the yen was very high," says Mr Koda.
On balance, though, Japan Inc is still in contraction mode. The Tankan survey showed that large companies across all industries plan to spend 2 percent less on land and fixed assets in the fiscal year that began on Monday, with much steeper falls in planned capital expenditure at small and medium-sized companies. Most manufacturers said they still had excess staff and production capacity, and expected to remain in surplus in June.
"A better external environment has failed to change large firms' attitude towards capacity in a notable manner," says Kiichi Murashima, chief economist at Citi in Tokyo.
And for some companies, a falling yen is a drag on profits. For example, steelmakers facing higher costs for shipments of iron ore said conditions had got much worse since December.
It will take more than a few months of monetary and fiscal stimulus to transform general expectations of growth, says Nobuaki Koga, president of the Japanese Trade Union Confederation, the country's biggest labor group.
(Read More: How Distant Is Japan's 2% Inflation Target?)
"Pulling Japan out of deflation requires first raising people's incomes to drive consumption," he says, adding that many small to midsized companies – which account for about 85 percent of jobs in Japan – are reluctant to do that as conditions are still "severe".
Meantime, he says he sees "big dangers" in Mr. Abe's policy prescriptions. Further declines in the yen brought about by monetary easing could start having an impact on daily lives through higher food and utilities prices, while a looser fiscal policy could lead to a "loss of credibility" in government bonds.
"Genuine structural reforms are the only things that can change expectations," says Mr Koga. "Of the 'three arrows', the third is by far the most important."