Japanese Manufacturing Sentiment Slips

Big Japanese manufacturers grew less confident about business conditions in the three months to December, a government survey showed, while the central bank chief gave few fresh clues on the timing of a rate increase.

Bank of Japan Governor Toshihiko Fukui reiterated Monday that he has no preset idea on the timing of future rate hikes and pointed to some weakness in consumption. But he stressed that the central bank would carefully watch upcoming economic indicators to make up its mind.

With the BOJ's emphasis on analyzing economic data such as prices and consumption investors were sidelined before key data such as consumer prices due Tuesday, showing muted reaction to Monday's business sentiment survey.

The business survey index (BSI) on sentiment at large manufacturers in the October-December quarter was plus 7.1, compared with plus 12.7 in July-September.

The index measures the percentage of firms that expect the business environment to improve minus those that expect it to worsen in the survey conducted by the Ministry of Finance and the Cabinet Office's Economic and Social Research Institute.

"The business sentiment overall is not bad, just like we saw in the BOJ's tankan survey," said Noriaki Haseyama, an economist at Dai-Ichi Life Research Institute. "As for the possibility of the BOJ raising rates in January, CPI, household spending and production figures will be closely watched. But unless we will get really strong figures, it will be hard for the BOJ to raise rates."

The BOJ left its key overnight call rate target unchanged at 0.25% at the policy meeting that ended last Tuesday, after raising it from zero in July, the first rate increase in six years.

The business sentiment survey also showed firms see capital spending rising 8.6% in the financial year ending next March 31 and recurring profits growing 3.6%.

But companies are more cautious about the outlook for the coming months amid concerns that a U.S. economic slowdown could hurt Japan's economy.

The BSI for big manufacturers was seen at plus 5.8 for January-March and plus 3.3 for April-June. The result was largely in line with the BOJ's quarterly tankan survey released earlier this month, which showed firms grew slightly more optimistic as the economy reached its longest growth cycle of the postwar era.

Eyes on CPI, Consumption

After the BOJ kept interest rates unchanged at 0.25 percent as expected last week, Fukui said consumption and prices were somewhat weak, helping to scale back market expectations for a rate increase in January.

The Japanese government also cited sluggishness in consumption in its December monthly economic report on Monday. "The economy is recovering, although there is some weakness in consumption," the Cabinet Office said in its latest report, keeping the assessment of the
economy unchanged from November.

As for the outlook, personal consumption, with improvement in employment, is expected to increase if the growth of income changes for the better," it said.

Fukui said on Monday that the BOJ would carefully examine new information on economic and price developments in determining the timing of the next rate increase. "A forward-looking approach does not imply that we have predetermined the level of the target rate in the future or the timing of a policy change," he said in a speech to the business lobby, Nippon Keidanren.

"New information on economic and price developments comes up every day. We hope to carefully examine this information and gauge the economic outlook with a candid view to make the most appropriate decision."

While there has been some weakness in personal consumption, consumption will maintain its rising trend as growth in wages and household income picks up. While maintaining a cautious stance on the economic outlook, Fukui added that Japan's basic mechanism, in which production, income and spending grow in a favorable cycle, remain intact.