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Japanese business optimism improves in June

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Staff Writer | July 17, 2018
The IHS Markit Business Outlook survey for June signals a stronger level of optimism among Japanese private sector companies towards output over the coming 12 months.
Asia   Sector level data for Japan indicates a greater degree of optimism
Improved business activity expectations are supported by positive forecasts for both demand and employment.

That said, higher input prices and strong competition are set to impact profit margins over the coming 12 months, with expectations towards profitability falling to a near two-year low.

June’s Business Outlook survey points to a firmer level of confidence among private sector companies in Japan.

This is signalled by the net balance of firms anticipating output to increase over the coming 12 months rising to +19% in June, from +16% in February.

Although the level of positive sentiment is above the series average, it continues to be the weakest of all countries monitored by the Business Outlook survey.

Sector level data for Japan indicates a greater degree of optimism among manufacturers than service providers, a trend which has been apparent since February 2013.

Expectations of higher employment, improved demand and plans to launch new products were generally mentioned by panellists who anticipate business activity to rise over the coming 12 months.

Some firms also noted that the upcoming 2020 Tokyo Olympic Games will present them with new business opportunities.

As has been the case since data collection began in October 2009, Japanese private sector firms expect new business inflows to rise over the next year.

The degree of sentiment is broadly unchanged from the last survey period in February, while sector level data points to stronger optimism towards order books among manufacturers.

New client acquisitions and greater international demand were mentioned by businesses anticipating new order growth.

Some also predict sales to be boosted ahead of the upcoming sales tax hike next year.

In line with forecasts of greater sales, firms are set to respond by increasing their workforce numbers.

Panellists anticipate that continued economic growth will enable them to keep hiring extra staff.

That said, employment prospects were slightly less optimistic relative to developed markets as a whole.

Service providers have the strongest hiring intentions since the survey began in late 2009, while their manufacturing counterparts are the least optimistic since October 2016.

Upbeat forecasts regarding new business and employment coincide with projections of increased investment.

Capital expenditure plans are strongly positive across both goods-producing and serviceproviding sectors of the Japanese economy and broadly in line with the rest of the developed world.

Input cost expectations continued on an upward trajectory in the latest survey period.

Forecasts of raw material price rises, particularly for oil, and labour cost increases were linked to predictions of greater cost burdens.

In fact, the net balance of firms anticipating higher operating expenses is the highest since the survey began.

Firms plan to raise their output prices over the coming year.

However, despite anticipated stronger input cost pressures, expectations towards future selling price inflation are broadly unchanged, with panellists reporting strong competition and the risk of further yen appreciation as factors weighing on their ability to hike output charges.

Projections of more intense competition and stronger input costs are set to weigh on profits.

Optimism towards future profitability fell to a near two-year low in June.

Weaker optimism was broad-based across both manufacturers and service providers, with the softest degree of confidence in the latter.