Russia’s invasion of Ukraine cools business sentiment

The impact of Russia’s invasion of Ukraine has caused business confidence to deteriorate. Companies need to conduct comprehensive reviews of business risks and strengthen measures to deal with high costs and difficulties in procuring goods, among other issues.

The Bank of Japan has released its Tankan quarterly economic survey for March. Regarding the diffusion index, which indicates business confidence among companies, the index for large manufacturers, the main indicator, stood at plus 14, down three points from the previous quarter. This was the first drop in seven quarters, since the June 2020 survey.

By industry, the decline was significant in sectors including pulp and paper, automobiles, electrical machinery and food products.

The Ukraine crisis erupted amid a global inflationary trend due to supply constraints stemming mainly from labor shortages and logistic disruptions. Price hikes of crude oil, food and raw materials are accelerating.

Many companies are probably concerned that their profits will be squeezed by rising costs. Automobile and electrical machinery industries are reportedly suffering from a shortage of semiconductors.

The index showing the outlook for the economy over the next three months fell to plus 9, down five points. This could be a reflection of concerns about the possibility of a prolonged Russian invasion.

Trade with Russia is highly likely to stagnate for the time being. With this in mind, companies must rethink their medium- and long-term strategies. A review of supply chains is urgently needed.

First, Japanese companies should reduce their dependence on Russia for oil and liquefied natural gas (LNG).

Besides, 40% of palladium, which is used mainly in automobile exhaust gas purifiers, is imported from Russia. Russia is also a major source of iron alloys essential for steel production.

The Economy, Trade and Industry Ministry said it will aim to improve domestic production and recycling technologies for seven important commodities, including oil, LNG and palladium, and to stabilize their procurement in cooperation with Japan’s allies. The ministry needs to make efforts to provide effective support for that purpose.

Despite growing uncertainty over the future, investment should not be neglected in such fields as decarbonization and digitization, which are priority areas.

According to the Tankan survey, capital investment planned by large manufacturers for fiscal 2022 marked a year-on-year increase of 8.4%, much higher than the 3.2% increase planned for fiscal 2021 in the same period last year. Planned, steady investment is desirable for long-term growth.

On the other hand, the index for large non-manufacturers, which are mostly related to domestic demand, dropped one point from the previous survey to plus 9, the first decline in seven quarters. In particular, the index for accommodation and dining establishments, which are still affected by the coronavirus pandemic, remains at a low level, decreasing five points to minus 56.

There are signs that infections are about to spread again. It is hoped that the government will support struggling companies through such measures as continuing steps to improve their financing.

(From The Yomiuri Shimbun, April 2, 2022)