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Japan Service Sector Mood Improves But Omicron Clouds Outlook

Big firms expect conditions to worsen ahead as high fuel prices and a weak yen push up import costs

People cross a street in Tokyo in March 2015. File photo by Yuya Shino, Reuters.


Japan’s service sector mood improved to a two-year high but the recovery among manufacturers has stalled, a closely watched central bank survey showed on Monday.

This was seen as a sign that rising raw material costs were weighing on the economy’s recovery from the pandemic.

Big firms expect conditions to worsen ahead as high fuel prices and a weak yen push up import costs, reinforcing expectations Japan will maintain massive fiscal and monetary support to underpin a fragile economy.

“Non-manufacturers’ sentiment got a boost from the end to pandemic curbs, while supply constraints hit manufacturers,” Toru Suehiro, an analyst at Daiwa Securities, said.

“Overall, business confidence lacks strength with both manufacturers and non-manufacturers expecting conditions to worsen,” he said.

The headline index gauging big manufacturers’ sentiment stood at plus 18 in the final quarter of 2021, unchanged from the previous quarter and below a market forecast for plus 19, the Bank of Japan‘s (BOJ) tankan survey showed on Monday.

Omicron Shadow

Rising costs and auto output disruptions hit industries such as non-ferrous metals, chemicals and machinery, it showed.

By contrast, big non-manufacturers’ sentiment improved for the sixth straight quarter at plus 9, up from plus 2 in September and exceeding market forecasts of plus 6.

The index hit the highest level since December 2019, as the September 30 lifting of state of emergency curbs to combat the Covid-19 pandemic boosted morale among retailers.

But the survey, conducted for a month through December 10, likely did not incorporate much of the recent spread of the Omicron variant, with nearly 80% of the replies coming in by November 29.

Rising Raw Material Costs

Rising raw material costs add to uncertainty by squeezing profits of firms just emerging from the pandemic’s hit.

An index gauging big manufacturers’ output prices rose to levels last seen in 1980, though the gauge for input prices was also at its highest since 2008, the survey showed, a sign firms may struggle to hike prices as much as needed to cover costs.

Companies expect inflation to hit 1.1% a year from now, the tankan showed, marking the highest level since September 2015.

Despite the murky outlook, companies plan to increase hiring and capital expenditure to deal with a chronic labour shortage.

Big firms plan to increase capital spending by 9.3% in the year ending in March 2022, less than market forecasts for a 9.8% gain but rebounding from an 8.3% drop in the previous year.

Tankan Shows Corporate Funding Continued to Ease

Separate data showed machinery orders, a leading indicator of capital expenditure, rose in October for the first time in three months.

The tankan also showed corporate funding continued to ease, giving the BOJ scope to phase out emergency support deployed last year to combat a pandemic-induced credit crunch.

Japan has lagged other countries in staging a strong rebound from last year’s pandemic hit, shrinking an annualised 3.6% in July-September due to weak consumption and output hit by a spike in infections and supply constraints.

While analysts expect growth to bounce back in the final quarter of this year, some warn the emergence of Omicron clouds the outlook and may keep the recovery feeble next year.


  • Reuters with additional editing by Kevin Hamlin

The photo on this report was changed on December 13.






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Kevin Hamlin

Kevin Hamlin is a financial journalist with more than 40 years of experience covering Asia. Before joining Asia Financial, Kevin worked for Bloomberg News, spending 12 years as Senior China Economy Reporter in Beijing. Prior to that, he was Asia Bureau Chief of Institutional Investor for ten years.


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