TOKYO -- Business sentiment among Japan's largest manufacturers marked a second straight quarterly uptick in December on the back of a recovery in exports and government economic stimuli such as domestic travel subsidies, according to the Bank of Japan's latest Tankan quarterly survey, published on Monday.
Broad-based improvements, in both manufacturing and nonmanufacturing and in large and small businesses, indicate that the economy is supported by both exports and domestic recovery," said Junichi Makino, an economist at SMBC Nikko Securities.
But the outlook is uncertain because the government of Prime Minister Yoshihide Suga faces a dilemma: It wants to stimulate economic activity, but that tends to increase the risk of coronavirus transmission. On Monday, his government is expected to announce a halt to the subsidy program for travel to and from Tokyo and Nagoya amid rising infections. "That is likely to mean divergent fortunes for businesses, with a continued recovery in exports and a slowdown in domestic services sectors," Makino said.
Japan's economy is struggling to get back to pre-COVID-19 pandemic levels, and the tepid performance from October to December is likely to result in current loose monetary policy being left in place.
The headline diffusion index (DI) of sentiment among large manufacturers reached minus 10 in December, up from minus 27 in September -- a second straight quarterly improvement.
Economists were predicting minus 15 for the index, according to a poll conducted by QUICK, a Nikkei group company. The index hit a bottom of minus 34 in June, the worst result since the Lehman crisis of 2009.
The large manufacturers' DI for March is forecast at minus 8.
DI is derived by subtracting the percentage of companies that regard business conditions as poor from those that are optimistic. Large manufacturers' DI is closely tracked by analysts as a clue to Japanese business sentiment.
Sentiment among large nonmanufacturers was minus 5, up from minus 12 in September. Economists had predicted minus 5.
The large nonmanufacturers' DI for March is forecast at minus 6.
The survey was held between Nov. 11 and Dec. 11, a period that coincides with the "third wave" of coronavirus infections in Japan.
In the fourth quarter, new car sales recovered to 2019 levels, and automobile exports also grew. Strong auto sales and production were reflected in a sharp rebound in business sentiment among automakers and steelmakers.
Service sector activity has benefited from the government's Go To campaign to promote domestic travel. "The Go To campaign has had a big impact on the service sector," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. Kumano recalled a shinkansen train car packed with elderly tourists when he traveled for business recently.
Hotels and restaurants are among the hardest hit by the pandemic. Business confidence in these industries could suffer again if restrictions are reimposed, while the retail sector, which has benefited from the eat-at-home trend, might see its positive fortunes continue.
The Tankan showed that spending on business investment at large corporations has been revised downward to minus 1.2% from plus 1.4% for the fiscal year ended in March 2021, signaling companies' defensive stances as they brace for protracted spread of the coronavirus. However, the fact that businesses are keeping investments close to the previous year's level indicates that they are also looking ahead to a post-pandemic economic recovery, Kumano said.
The economy's recovery, albeit slow, has been helped by the BOJ's aggressive credit easing. Under emergency funding facilities, a total of 130 trillion yen ($1.25 trillion) have been made available to businesses and individuals suffering the fallout from the pandemic.
The special credit facilities are for now due to last until the end of March, but economists are waiting for a two-day BOJ policy meeting on Dec. 17 and 18 to see if these are likely to last longer.