While the first quarter of the year wasn’t stellar for the Japanese business market (experiencing a contraction) optimism was on the rise heading into the second and third quarter. Many mid to large-sized companies have been optimistic about a rebound, but as rhetoric between the U.S. and China intensifies over trade disputes, it’s tempering some of that enthusiasm.
Reuters Tankan keeps track of business sentiment and found that while the service sector morale throughout the country has been relatively unchanged, there was a mood of hopeful expectation among manufacturers that a rebound was on the way.
Within the survey, many of the respondents reported some concern about increasing energy costs and a labor shortage that was driving up hiring expenses. They were also seeing the rising cost of materials potentially being problematic for long-term growth and prosperity.
However, one of the biggest concerns among the respondents -most of whom were listed as ‘anonymous’, was that there is uncertainty on a global scale due to the increasing friction between China and the United States. That is translating to more tempered enthusiasm regarding capital investments, which is an essential component of manufacturing growth.
An underlying concern for many businesses throughout Japan is the ratcheting up of accusations and rhetoric between the U.S. and China over trade issues.
The Sentiment Index Is Still Expected to Rise
Currently, the manufacturer’s sentiment overall was rated as ‘25’ on the scale measured by Reuters Tankan. That highlights a 1-point drop from when the survey was conducted the previous month. This most recent survey was conducted between July 2-13.
Expectations are still positive, with an index of 29 being reached by October this year. That indicates a more positive long-term outlook for the manufacturing industry throughout the country. As for the service industry, the index also dropped 1-point between June and July, from 35 to 34, but that number is expected to remain steady through October.
The Mood for Non-Manufacturers Improved
Large firms are still focused on delivering solid capital spending plans and that is providing some measure of relief to these industries as they look ahead.
Yet, an underlying concern for many businesses throughout Japan -especially the manufacturing sector, which relies heavily on export and import for materials and products they create- is the ratcheting up of accusations and rhetoric between the U.S. and China over trade issues. Recently, China publicly accused the U.S. of bullying in its efforts to improve trade negotiations. The Trump Administration threatened to add 10 percent import tariffs on $200 billion in Chinese products and the Chinese government countered with a threat to also do the same.
The focus on the Trump Administration appears to be eliminating tariffs and opening up free trade among all nations and has publicly stated the current deal between the U.S. and other nations, including China, is unfair to the U.S. and thus putting it at a competitive disadvantage.
While the back and forth between the United States and China does have some international businesses concerned about the future, the short-term impact appears to be having little impact on optimism for Japanese businesses.
The index noted earlier is calculated by deducting the percentage of pessimistic survey responses from optimistic ones, and if the pessimistic attitude outweighs the optimistic ones, the number itself would be negative. At 25 with an expectation to increase to 29 by October, it’s a good indicator that the business climate in Japan, overall, is still positive.