Japanese firms show surprising optimism in boost for new PM

Confidence among big Japanese businesses unexpectedly improved for a fifth straight quarter, defying a record wave of the coronavirus and suggesting a potentially faster recovery under the nation’s new prime minister.   

Sentiment among large manufacturers rose to 18 in the three months through September from 14 in the prior period, according to the Bank of Japan’s quarterly Tankan survey released on Friday. The reading for service businesses edged up one point to 2.

Big firms of all types said they plan to boost investment by about 10%, slightly more than the plan three months ago. That suggests incoming premier Fumio Kishida, who takes the helm on Monday, may inherit an economy somewhat less damaged by the pandemic than anticipated.

“The numbers suggest economic sentiment won’t collapse any time soon,” said economist Mari Iwashita at Daiwa Securities . “Capital investment is holding up, too.”

Most of the Tankan survey responses came before it was clear Kishida would win this week’s party leadership election, so the results are more likely to partly reflect relief over the departure of unpopular outgoing Prime Minister Yoshihide Suga than faith in the new premier.

Kishida is widely expected to compile a sizeable fiscal package to shore up the economy and woo voters before national elections expected in November. 

The incoming premier is also seen shaking up his economic team, with reports that former Olympics minister Shunichi Suzuki is likely to be tapped to replace finance minister Taro Aso, an 81-year-old who has held the post longer than anyone else in the country’s modern era.

Today’s stronger-than-expected results suggest resilience among firms to the spread of the Delta variant of the virus. 

Prospects for service businesses should improve as virus cases have fallen dramatically since a record wave in summer, allowing the government on Friday to lift a state of emergency that has dragged on the domestic economy and limited operations at places such as bars, restaurants and entertainment venues. 

“The Bank of Japan’s latest Tankan suggests the economy is on a stronger footing, with companies - particularly large manufacturers - boosting investment plans, said Bloomberg Economics economist Yuki Masujima. “With the state of emergency now lifted, we expect a gradual recovery in the fourth quarter, supported by pent-up demand.”

Still, the report showed further evidence of the supply chain disruptions that have forced factory stoppages at Toyota and other Japanese automakers. Stocks of finished goods at large manufacturers dropped to the lowest level since the bubble period of the late 1980s.

That may have been the reason the outlook gauge among manufacturers showed no improvement as would normally be the case during a solid recovery. 

“There’s no question that companies remain concerned about the spread of the virus and supply side constraints,” said Daiwa’s Iwashita. “When those concerns go away, they are going to be able to sketch out a firmer recovery scenario.”

Bloomberg. More stories like this are available on bloomberg.com