Japanese Industry Sentiment Index Falls to Six-Year Low

According to the Bank of Japan’s latest Tankan report, the mood among Japan’s large industrial companies has fallen to a six-year low. The corresponding sentiment index only reached a value of 5 points on the scale of +100 to -100 in the third quarter. There are two main reasons for the decline in sentiment. On the one hand, the export-oriented Japanese industry continues to have sales problems, which have to do with the US-Chinese trade conflict or reduced demand from China. On the other hand, much uncertainty has arisen about the actual purchasing intentions of domestic consumers in the run-up to the VAT increase (from October 1). The index of the propensity of private households to buy has been plummeting for some time now. At the same time, however, there were good retail sales, which apparently had to do with pull-forward effects. Now, however, demand for consumer goods is likely to fall significantly for the time being, with repercussions for the business environment of companies.

Large companies in the service sector have a more positive attitude. Their index fell „only“ by two points to 21 points. However, the mood in this sector is becoming ever lower as the size of the company decreases. In the case of small and only locally operating companies, however, it remained at least constant at 10 points.

As negative as it may seem that the index for industry mentioned at the beginning has now fallen for the seventh quarter in a row, there still remains a hint of optimism for the Japanese economy: First, there is still a majority – albeit very small – of companies in Japan that, despite all the problems, still assess their current business environment as a whole positively. And secondly, the Tankan’s latest index values remained above market expectations across virtually all sectors and company sizes. In this respect, the Tankan was a positive surprise.

What is worrying, however, is that Japanese companies are still sceptical about the future. Almost all the companies surveyed do not expect their business environment to brighten in the coming months, but rather continue to cloud over. Against this backdrop, the question arises as to whether the government will not be prepared in the end to give investment activity and thus the economy a boost with a new fiscal package.

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