Tankan: Japanese business sentiment turns positive

Workers at Toyota factory in Japan Japan's big manufacturers expect business conditions to improve further in the current quarter

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Japanese manufacturers' sentiment has turned positive for the first time in nearly two years, the Bank of Japan's Tankan survey has indicated.

The big manufacturers' index rose to plus 4 in the April-to-June period, from minus 8 in the previous quarter.

Large manufacturers also plan to boost their capital spending in the current financial year, the survey showed.

Japan has unveiled aggressive policy moves in recent months to try to spur growth in its stagnant economy.

Analysts said the survey's results indicated that the policies were starting to have an impact.

"The Tankan confirmed that expectations among big Japanese manufacturers for a weaker yen and a steady economic recovery more than offset recent market turmoil," said Takeshi Minami, chief economist as Norinchukin Research Institute, in Tokyo.

"Industrial output is rising slowly, exports are recovering gradually, public works are expected to come out more strongly and next year's sales tax hike will prompt a last-minute buying rush later this year.

"All of these positive factors, together with the effects of 'Abenomics', are encouraging to Japanese firms."

Yen factor

Among the measures that the Japanese policymakers have taken over the past few months has been the decision by the central bank to double its inflation target to 2%.

Japanese Yen v US Dollar

Last Updated at 06 Feb 2015, 08:40 ET JPY:USD twelve month chart
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Unlike many other countries in the region, Japan has been battling falling consumer prices, or deflation, for best part of the past two decades.

That has hurt domestic consumption as business and consumers tend to put off purchases in the hope of getting a better deal later on.

In an attempt to fight deflation and to boost overall economy, the Bank of Japan has doubled the country's money supply.

The idea is that with with more money being pumped into the system, coupled with low interest rates, businesses and consumers will have more cash to spend and that will help spur demand as well as prices.

The moves have had a significant impact on the Japanese currency. The yen has dipped nearly 25% against the US dollar since November last year.

Analysts said that the weakness in the yen was one of the key factors in boosting manufacturers' sentiment, especially that of the exporters, as it makes their goods more affordable for foreign buyers.

A weak yen also boosts their earnings when they repatriate their foreign earnings back home.

"The improvement in big firms' sentiment was largely driven by yen weakness, which supported exports, and the recovering economy overall," said Taro Saito, director of economic research as NLI Research Institute.

"Big manufacturers' assumed yen rate against the dollar for this fiscal year is still stronger than the market rate, so there is a chance that their profit forecast for this fiscal year will be upgraded."

Real growth

The latest survey suggests companies are planning to boost levels of investment in the current financial year.

Some analysts said that companies were likely to have more cash to spend as they see profits rise.

Martin Schulz from Fujitsu Research Institute said increased investment from big firms was likely to further assist the revival of the Japanese economy.

"Right now the economy is boosted by a weak yen and hopes of a growth-boost," Mr Schulz told the BBC.

"But once companies start to spend, that is when you see a real impact on the economy."

He said increased investment not only created jobs, but also saw salaries rise, giving more spending power to consumers.

"That helps the recovery process tremendously," he said.

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