May 18, 2014 / 11:34 PM / 5 years ago

Japan business mood hit by tax hike; rebound seen ahead: Reuters Tankan

TOKYO (Reuters) - Japanese business confidence slid in May in a sign that last month’s sales tax hike is cooling activity, but the mood is seen improving in the months ahead, and some executives seemed more concerned about lukewarm exports hampering the economic recovery.

A shopper looks at earphones displayed at a mobile phone store at Tokyo's Ginza shopping district May 15, 2014. REUTERS/Yuya Shino

The monthly Reuters Tankan poll, which closely correlates with the Bank of Japan’s tankan survey, added to anecdotal evidence suggesting that the pain from the April 1 tax rise will likely be short-lived.

“We have faced a pullback in demand but customers are coming back to our stores across the country,” said one retailer.

The Reuters Tankan readings underline the Bank of Japan’s argument that the world’s third-largest economy can ride out the tax-hike impact, and could ease pressure for fresh stimulus to shore up growth.

The BOJ is set to stick to its upbeat view of the economy at its policy review this week, suggesting that no immediate expansion of monetary stimulus is forthcoming.

In the Reuters Tankan poll for May, the index of sentiment among manufacturers fell to plus 19 from a near seven-year high of plus 25 in the previous month. At plus 21, the service-sector gauge was down 14 points from a record high in April.

The indexes for manufacturers and non-manufacturers are expected to improve to plus 21 and plus 28 respectively in August, meaning that optimists outweighed pessimists.

The increase in the sale tax to 8 percent from 5 percent has stoked worries that it could severely crimp consumption and derail the economic recovery engineered by Prime Minister Shinzo Abe’s aggressive fiscal and monetary stimulus policies.

Still, while companies voiced concern about uncertainty over the impact of the sales tax hike, signs Japan’s export engine remains underpowered have become a bigger headache for policymakers.

Company executives noted that slowing growth in China and other emerging markets have dragged on exports and the economic recovery.

“Global demand lacks momentum as a sluggish Chinese economy and geopolitical risks over Ukraine weigh, although the U.S. economy is showing clear signs of recovery,” a nonferrous metal company said in the Reuters poll.

A total of 246 firms responded to the Reuters poll of 400 big and medium-sized firms taken April 25-May 12. Indexes are calculated by subtracting the percentage of pessimistic responses from optimistic ones.

All but steel/nonferrous metals and real estate/construction industries suffered a drop in sentiment in May, with retailers and food processing firms hardest hit.

Over the next three months, only steel/nonferrous metals and autos/transport equipment industries saw business conditions worsening, while the sentiment at retailers is expected to stage a strong rebound in a sign of firm domestic demand.

Last month the BOJ tankan showed the business mood edged up in the March quarter, but both big manufacturers and non-manufacturers expected conditions to worsen in June.

The BOJ has stood pat since offering an intense burst of monetary stimulus in April last year, pledging to double base money via aggressive asset purchases to accelerate consumer inflation to 2 percent in roughly two years.

Policymakers got some comforting news last week from data showing the economy is capable of steering through temporary dips in growth.

Japan’s economy grew at its fastest pace in more than two years in the first quarter as consumer spending jumped and business investment turned surprisingly strong in a sign of confidence in the prospects for future growth.

Analysts and policymakers expect the economy to contract in the current quarter due to the expected chill in consumption, before returning to moderate growth in the following quarters on the back of improving job conditions and rising wages.

Editing by Shri Navaratnam

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