According to the monthly Reuters Tankan survey, sentiment at big Japanese manufacturers surged in December, improving for a second straight month as the auto sector continued to recover from last year’s semiconductor shortage and supply chain woes. The survey, which tracks the Bank of Japan’s (BOJ) closely-watched tankan quarterly survey, found that the sentiment index for manufacturers rose to 27, up from 25 in November and 23 in October. The index was also up two points compared with three months ago, indicating a sustained improvement in business conditions.
The survey, conducted from Nov. 21 to Dec. 4, showed that the manufacturers’ mood was boosted by industries such as electrical equipment, oil refinery/ceramics, and steel/nonferrous metals, which benefited from strong domestic and overseas demand. The survey also found that the manufacturers’ outlook for the next three months was optimistic, with the index expected to rise further to 28 in March.
Auto Industry Leads the Recovery
One of the main drivers of the recovery in the manufacturing sector was the auto industry, which faced severe challenges last year due to the global chip shortage and the COVID-19 pandemic. The sentiment index for the transport equipment industry, which includes automakers, rose to 32 in December, up from 30 in November and 28 in October. The index was also up 12 points compared with three months ago, reflecting the resilience of the industry amid the supply chain disruptions.
The auto industry has been able to cope with the chip shortage by adjusting production plans, securing alternative sources, and increasing inventories. The industry has also seen a rebound in sales in key markets such as the U.S. and China, as well as in Japan, where the government has extended subsidies for eco-friendly vehicles. A manager at a transport equipment maker wrote in the survey that the business conditions were “good” thanks to the recovery of the U.S. and Chinese markets and the expansion of the domestic market.
Service Sector Sentiment Remains Weak
While the manufacturing sector showed signs of robust recovery, the service sector remained weak, as the survey found that the sentiment index for non-manufacturers fell to 34 in December, down from 35 in November and 36 in October. The index was also down one point compared with three months ago, suggesting that the service sector was lagging behind the manufacturing sector in terms of recovery.
The survey, which covers industries such as retail, wholesale, construction, and real estate, showed that the service sector was hampered by the prolonged impact of the COVID-19 pandemic, which has dampened consumer spending and tourism. The survey also found that the service sector’s outlook for the next three months was pessimistic, with the index expected to fall further to 31 in March.
A manager at a retailer wrote in the survey that the sales were “stagnant” due to the lack of tourists and the decline in consumer sentiment. A manager at a wholesaler wrote that the business conditions were “not so good” due to the high costs of raw materials and transportation.
Implications for the BOJ Tankan and Monetary Policy
The Reuters Tankan survey, which strongly correlates with the BOJ’s tankan quarterly survey, suggests that the BOJ tankan, due on Dec. 15, will show a mixed picture of the Japanese economy, with a divergence between the manufacturing and service sectors. The BOJ tankan is one of the key indicators that the central bank uses to assess the economic conditions and the inflation outlook, and it influences its monetary policy decisions.
The BOJ is expected to maintain its ultra-easy monetary policy stance at its policy meeting later this month, as it faces the challenge of supporting the economy amid the pandemic while keeping an eye on the side effects of its stimulus measures. The BOJ has kept its short-term interest rate at -0.1% and its target for the 10-year government bond yield at around 0%, while also providing ample liquidity and cheap funding for businesses and households. The BOJ has also introduced a new scheme to incentivize banks to lend more to green and digital projects, as part of its efforts to address the long-term structural issues of the economy.
The BOJ is likely to revise up its economic projections for the current fiscal year, which ends in March 2022, as the economy has shown stronger-than-expected growth in the July-September quarter, driven by both external and domestic demand. However, the BOJ is also likely to maintain its cautious outlook for the next fiscal year, as it faces uncertainties over the pandemic, the global supply chain disruptions, and the inflationary pressures.