Business Expectations At Record High

The Economy Watchers Survey for January was extremely positive about both current conditions and the outlook. Sentiment is mainly driven by the yen’s depreciation, which should improve profitability for exporting firms. However, in some sectors, companies find it difficult to pass on the higher import prices to their customers.

The business climate has considerably improved since the announcement in November of the general election which returned the LDP to power. Yesterday, the Cabinet Office announced that business conditions indices for December had increased, even though it left its assessment of the coincident indicator unchanged at “worsening”. Today, this trend was confirmed by the Economy Watchers Survey for January, in which 2000 managers, selected from all sectors and regions, were questioned.

The Economy Watchers were extremely positive about both current conditions and the outlook. The current conditions index rose to 49.5, a gain of almost 4 points. The level is not exceptionally high. Note that, the survey results are not seasonally corrected. The January outcomes are often depressed as business is usually slow due to bad weather.

The outlook indices are less affected by seasonal variations. The overall index gained 5.5 points and is now at its highest level since February 2006. Household-related businesses expect an increase in demand as consumers prepare for the VAT rate hike next year. Moreover, consumer spending might be boosted by the improvement in labour market conditions. However, some businesses remain cautious, fearing a sharp fall in sales after the VAT rate hike.

In the business-activity related sectors, firms have noted an improvement in enquiries and orders. This is largely driven by the yen’s depreciation, which should improve profitability, and the rise in stock prices. However, this improvement might be limited until the expiration of existing forward exchange contracts. However, some industries have been complaining about the price increases for imported goods. In the current deflationary climate they find it hard to pass on these higher prices to their customers.

The employment outlook has improved thanks to the announcement of the fiscal stimulus plan. These mainly concern jobs in the construction sector. Companies related to electrical machinery and transportation equipment are still shedding jobs.

BY Raymond VAN DER PUTTEN

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