According to the latest IHS Markit Business Outlook survey, expectations towards private sector business activity in Japan deteriorated to a three-year low in June.
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Optimism has now declined in each of the past three survey periods and only China ranks lower globally.
A net balance of +11% of companies forecast business activity growth over the next 12 months, down from +13% in February, signalling softer optimism in Japan’s private sector.
Pulling confidence lower was a softer outlook at service providers, while sentiment in the manufacturing sector held close to February’s near sixand-a-half year low.
Suppressing business output expectations are concerns towards the upcoming consumption tax hike planned for later this year and uncertainty caused by global trade frictions.
Subdued business activity forecasts pulled the profitability outlook into negative territory for the first time since October 2010.
Capex and hiring intentions also moderated since February but remain stronger than their respective historical averages.
Some companies foresee growth opportunities arising from the 2020 Tokyo Olympic Games, while others anticipate that the launch of new products and investment into machinery will help drive growth.
Japan business activity expectations Private sector firms in Japan expect employment levels to rise over the coming year (net balance of +15%).
Although hiring intentions are softer than February’s record high (+21%), they remain stronger than seen on average at both the global (+10%) and developed market (+11%) level.
Furthermore, plans to expand recruitment are broad-based across both manufacturing and services.
Meanwhile expansion plans supported positive forecasts for capex in June, as a net balance of +13% of firms expect greater investment at their businesses over the next year.
Cost pressures are set to build over the coming 12 months as firms predict expenses relating to labour and other non-staff related inputs will increase.
The rise in the sales tax, as well as forecasts of greater fuel and shipping costs are mentioned by panellists as factors underpinning non-staff cost inflation forecasts.
Furthermore, wage pressures are expected to rise as an aging population restricts labour supply.
Businesses also foresee strong growth in staff costs over the coming year.
However, both manufacturers and service providers expect inflation to be softer than predicted in February.
Firms are expecting to pass through greater cost burdens to clients in the form of higher prices charged.
That said, the rate of selling price inflation is set to be the softest since October 2017.
For the first time since data collection started nearly ten years ago, both manufacturers and service providers anticipate reduced profitability.
This is the first time that overall corporate earning expectations have dipped into negative territory since October 2010, although the latest net balance was the lowest seen on record. ■