Japan business mood sours to six-year low as trade war takes heavier toll

Workers of Japan's auto maker Fuji Heavy Industries, known as Subaru brand, assemble flat-four engines in Japan on September 6, 2013.

Yoshikazu Tsuno | AFP | Getty Images

Japanese big manufacturers' business confidence worsened to a six-year low in the July-September quarter, a central bank survey showed, a sign the bitter U.S.-China trade war is taking a heavier toll on the export-reliant economy.

Sentiment of non-manufacturers also deteriorated with some retailers voicing concern over the potential impact of a sales tax hike kicking off on Oct. 1, the Bank of Japan's closely watched "tankan" survey showed on Tuesday.

The weak readings will keep the central bank under pressure to extend more monetary support for a fragile economy when its board meets for a rate review on Oct. 30-31.

But some analysts said business sentiment did not worsen as much as expected and capital expenditure was holding up, which may give the BOJ some breathing space in tapping its dwindling policy tool-kit.

"The outcome wasn't as weak as feared," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. "The economy is showing signs of slowdown but not falling off a cliff."

"Capital expenditure is also firm. I don't think today's data is gloomy enough to further heighten market expectations of near-term monetary easing."

The headline index for big manufacturers' sentiment stood at plus 5 in September, worsening 2 points from three months earlier but beating market forecasts for plus 2.

It marked the third straight quarter of decline and hit the lowest reading since June 2013 — two months after BOJ Governor Haruhiko Kuroda deployed his "bazooka" monetary stimulus.

The big non-manufacturers' sentiment index stood at plus 21, worsening from plus 23 in June and roughly matching a median market forecast for plus 20.

Worry on consumption

Both big manufacturers and non-manufacturers expect sentiment to worsen in October-December, as overseas growth shows little sign of pick-up and the domestic sales tax hike seen hurting household spending.

Retailers, restaurants and other service-sector firms saw sentiment deteriorate as they are more sensitive to any downturn in consumption from the higher levy, a BOJ official told reporters at a briefing on the tankan.

The survey also showed big firms plan to raise their capital expenditure by 6.6% in the financial year that ends March 2020, versus economists' median estimate of a 5.5% increase.

Capital expenditure has been among the few bright spots in Japan's economy as non-manufacturers continue to invest heavily on automation to cope with a tight labor market, offsetting the weakness in manufacturers' spending.

"Capital expenditure is holding relatively firm, backed by non-manufacturers' spending. But an expected delay in the global recovery and the tax hike pain may prod firms to delay spending plans," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"Today's results will be neutral to the BOJ's policy stance. I still think there's a 50-50 chance for the BOJ to ease further at the next policy review this month, depending on yen's move," he said.

While the BOJ kept policy steady in September, it signaled the chance of expanding stimulus as early as this month by issuing a stronger warning against overseas risks.

The tankan's sentiment indexes are derived by subtracting the number of respondents who say conditions are poor from those who say they are good. A positive reading means optimists outnumber pessimists.

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