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Misconduct by an automobile manufacturer regarding certification tests effectively had a negative impact on business confidence in the manufacturing sector. In contrast, nonmanufacturers benefited from an increase in the number of foreign visitors to Japan. Overall, corporate business confidence was patchy.
It is hoped that companies will not be swayed by business confidence alone, but rather will make efforts to achieve sustainable growth by raising wages and promoting investments for the long term.
The Bank of Japan has released its Tankan quarterly economic survey for March. The diffusion index indicates corporate business confidence. The index for large manufacturing companies, a leading indicator, was 11, down 2 points from the previous quarter. This is the first time in four quarters that business confidence has deteriorated.
By industry, the decline in the automobile sector was conspicuous, falling 15 points to 13. The automobile industry, which has a broad production base, is a key industry for Japan, and a sharp deterioration in business confidence is a cause for concern.
The decline was due to misconduct regarding quality data at Daihatsu Motor Co., the top maker of minicars in Japan, leading to a situation that temporarily halted production at all of its finished car plants in Japan.
This had a ripple effect on other industries as well, with the nonferrous metals industry, which supplies aluminum and other products, dropping 9 points, and the steel industry, which makes steel for car bodies, dropping 3 points. In addition, small and midsize enterprises in the automobile sector, such as parts manufacturers, were hit even harder, falling 32 points to minus 8.
It is important for the Toyota Motor Group, including its subsidiary Daihatsu, to make every possible effort to prevent a recurrence and promptly restore confidence in the group, and ensure that the effects of the irregularities are only temporary.
Meanwhile, in the Tankan survey’s diffusion index for large companies in the nonmanufacturing sector, which is mainly related to domestic demand such as in the service industry, rose 2 points to 34, the eighth consecutive quarterly improvement and the highest reading since August 1991.
The recovery in the number of travelers to Japan is providing a tailwind, with the visitors to the country in February reaching a record high of about 2.8 million for the month. Their spending in Japan also grew significantly.
By industry, the index for accommodations and food and drink services was 52, remaining at a record high level.
The progress in passing labor costs along through service prices also contributed to improvements in business confidence. If this trend leads to higher wages, a virtuous cycle that boosts consumption can be expected. This can be said to be a good opportunity for an economic recovery led by domestic demand.
However, the service industry is experiencing a serious labor shortage, particularly among small and midsize firms. Investments are needed to improve business efficiency and make labor-saving efforts.
Besides, if interest rates on loans to firms rise as a result of the central bank’s lifting of its negative interest rate policy, smaller corporations could face tighter cash flow situations. Support by financial institutions will also become important.
