Service sector

The mood of the services sector in Japan is improving; Omicron, rising Cloud Outlook costs | Investment News

By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) – Japan’s service sector sentiment improved to a two-year high but manufacturers’ recovery has stalled, a closely watched central bank survey showed, a sign that the rise raw material costs weighed on the economy’s recovery from the pandemic.

Major companies expect conditions to deteriorate going forward as high fuel prices and a weak yen drive up import costs, bolstering expectations that Japan will maintain massive fiscal and monetary support to support a fragile economy.

“Non-manufacturer sentiment has been boosted since the end of pandemic curbs, while supply constraints have hit manufacturers,” said Toru Suehiro, analyst at Daiwa Securities.

“Overall, business confidence lacks strength, with manufacturers and non-manufacturers expecting conditions to worsen,” he said.

The headline index measuring the sentiment of major manufacturers came in at plus 18 in the final quarter of 2021, unchanged from the previous quarter and below market forecasts of plus 19, the Bank of Dusseldorf’s tankan survey showed on Monday. Japan (BOJ).

Rising costs and disruptions to car production have hit industries such as non-ferrous metals, chemicals and machinery, he showed.

In contrast, sentiment in large non-manufacturers improved for the sixth straight quarter to plus 9, from plus 2 in September and beating market forecasts of plus 6.

The index hit its highest level since December 2019 as the September 30 lifting of state of emergency restrictions to tackle the COVID-19 pandemic boosted retailer morale.

But the survey, conducted for a month until December 10, likely didn’t capture much of the recent spread of the Omicron variant, with nearly 80% of responses received by November 29.

Rising raw material costs are adding to uncertainty by reducing profits for companies just emerging from the pandemic.

An index measuring the output prices of major manufacturers rose to levels not seen in 1980, although the input price gauge was also at its highest level since 2008, the survey showed, a sign that companies may find it difficult to increase prices as much as necessary to cover costs.

Businesses expect inflation to hit 1.1 percent a year from now, the tankan showed, marking the highest level since September 2015.

Despite the bleak outlook, companies plan to increase hiring and capital spending to address a chronic labor shortage.

Large companies expect to increase capital spending by 9.3% in the year ending March 2022, less than the market forecast for a 9.8% gain but rebounding from an 8% decline, 3% the previous year.

Separate data showed that machinery orders, a leading indicator of capital spending, rose in October for the first time in three months.

The tankan also showed corporate funding continued to decline, giving the BOJ the option to phase out emergency support rolled out last year to tackle a pandemic-induced credit crunch.

Japan lagged behind other countries in staging a strong rebound from last year’s pandemic, shrinking 3.6% annualized in July-September on weak consumption and hit production by a spike in infections and supply constraints.

While analysts expect growth to rebound in the last quarter of this year, some warn that the emergence of Omicron is clouding the outlook and could keep the recovery weak next year.

(Reporting by Leika Kihara and Tetsushi Kajimoto; Additional reporting by Kantaro Komiya; Editing by Sam Holmes)

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