Japan business mood seen muted; BoJ under pressure

Japanese business sentiment failed to improve as expected in the first quarter and is seen remaining muted in coming months, the Bank of Japan’s tankan survey showed, suggesting the central bank will remain under pressure to deliver more policy stimulus.The headline index for big manufacturers’ sentiment was minus 4 in March, unchanged from the reading in December and indicating pessimists continue to outnumber optimists, the closely watched quarterly survey showed yesterday.The reading, which reflects broad growth trends in the world’s third-largest economy and is one of the BOJ’s key policy gauges, was worse than the median market forecast for minus 1.Further, big manufacturers expect conditions to improve only slightly over the next three months, with the index for June seen at -3 compared with a median forecast of +2.“The tankan result increases the likelihood of additional easing, which I already anticipate, by the Bank of Japan this month, and slightly raises the possibility of additional easing next week rather than on April 27,” said Masamichi Adachi, senior economist at JPMorgan Securities Japan.“The BoJ could act to signal it is trying even harder to support the economy,” he said, suggesting it could increase a fund to buy bonds and other assets by ¥5tn ($60bn).That view is not universal. Others say as long as the economy is headed for a moderate recovery this year, the BoJ’s base case, there is no need for extra action to follow February’s surprisingly aggressive easing, though the tankan suggests an upturn may be more moderate than previously thought.BoJ Deputy Governor Hirohide Yamaguchi told a parliamentary committee there had been a positive impact from the February easing, when the central bank set a 1% inflation target and increased its asset-buying programme by ¥10tn.“The February easing has had a certain effect on market and business sentiment. But it’s too early to judge the overall impact of the policy,” Yamaguchi said.Prime Minister Yoshihiko Noda kept up the pressure, telling the same committee he believed the BoJ shared a common understanding with the government on the need to beat deflation.“I expect the BoJ, under the goal it has set for itself, continues to make efforts to achieve it, and strongly hope it takes appropriate and bold action,” Noda said.The BoJ sees the economy emerging this year from a downturn after it was hit in 2011 by an earthquake and tsunami, flooding in Thailand that disrupted supply chains, the yen’s advance to record highs and the eurozone debt crisis.Its surprise move in February helped knock the yen down to 11-month lows, a positive for exporters, but the survey showed many are not convinced the move will be sustained.Big manufacturers expect the dollar to average €78.14 in the fiscal year ending March 2013, the strongest for the yen since comparable data became available in 1996.The yen, which weakened after the release of the tankan, was trading around 83.10 to the dollar yesterday afternoonHighlighting caution about the economic outlook, the survey showed big firms did not plan to increase capital expenditure in the new fiscal year that started on Sunday, April 1, again missing a market forecast for a 1% increase.However, there was some resilience in private consumption, with the sentiment index for big non-manufacturers edging up to +5 from +4 in December, matching a median market forecast, although the index for June was flat at +5.The BoJ next meets on April 9-10 and then on April 27, when it will review long-term growth and price forecasts. Many in the market expect it to ease policy again in coming months to reinforce its commitment to pull the economy out of deflation.