Large Enterprises Benefit From Abenomics

Confidence among the large enterprises has considerably strengthened in Q2 according to the Tankan survey. Underpinned by improved profitability, they expect to step up investment. Nevertheless, excess capacity and overstaffing persist in the manufacturing sector. Enterprises anticipate a rise in interest rates in Q3.

As expected, confidence among the large manufacturing enterprises has considerably improved in Q2 according to the Tankan survey. The diffusion index (DI) increased to 4 compared with -8 only three month earlier. This is largely due to the improvement in profitability following the depreciation of the yen. Sentiment also improved for other manufacturers, even though their DI indices remained in negative territory. Overall, manufacturers expect business conditions to improve further in Q3. They estimate their profits to increase by close to 15% in FY2013.

In the non-manufacturing sectors, confidence also improved, albeit to a lesser degree. In particular, large construction enterprises and retailers were more upbeat compared with the preceding quarter. However, they did not expect any further improvement in Q3. On average, they expect hardly any improvement in profits for the current fiscal year.

Despite these improvements, manufacturers continued to report substantial excess capacity albeit to a lesser extent than in the previous quarter. Nevertheless, investment projections have been scaled up considerably, supported by an improved business environment and fiscal measures. Also in the non-manufacturing sector, enterprises have adjusted their investment plans, although these do not exceed last year’s capital spending.

Moreover, manufacturers continued to report considerable overstaffing. As it is difficult for Japanese enterprises to lay off permanent workers, employment only slowly adapts to output conditions. By contrast, in the non-manufacturing sector, firms report being substantially understaffed. This confirms reports that construction firms have found it hard to attract sufficient workers since the Tohoku earthquake in March 2011.

BY Raymond VAN DER PUTTEN