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Japan business sentiment logs longest drop since Lehman: BOJ Tankan

Closely watched indicator shows economy in pullback after tax hike

An automobile factory in Toyota, Japan. The latest Bank of Japan Tankan survey is the first to be announced since the Abe government raised the consumption tax on Oct. 1.

TOKYO -- Sentiment among Japan's large manufacturers slid for the fourth straight quarter in October-December, marking the longest decline since the Lehman crisis, the Bank of Japan's latest Tankan survey showed on Friday.

The closely watched index of sentiment among large manufacturers fell to zero from plus 5 in the July-September period, marking the lowest reading since 2013. Economists had expected a reading of 2, according to a survey of 19 economists polled by Nikkei group company QUICK.

The survey showed that sentiment among large nonmanufacturers slid to plus 20 from plus 21.

The relative resilience of the service index took the market by surprise. "The Tankan shows that the domestic economy remains resilient despite a tough export environment," said Yuichi Kodama, chief economist for Meiji Yasuda Life Insurance. "The data appear to indicate that the economy is still on a gradual recovery path."

The mixed results come after the country's consumption tax was raised on Oct. 1 -- the first major tax increase in five years. The increase led many consumers to front-load purchases, especially for big-ticket items such as cars, resulting in a sharp spending pullback in October and November.

The sector hardest hit by the tax hike was the auto industry. The government introduced tax breaks for eco-friendly cars to mitigate the impact of the higher tax, but "that still couldn't stop sales from sliding," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

The situation was further exacerbated by Typhoon Hagibis, which hit the Tokyo region on Oct. 12, a Saturday. Many shops closed over that weekend, causing a sharp drop in sales and dampening business prospects. "The stores had to be closed in one of the busiest seasons of the year," said Shuichi Sato, spokesman for Kanagawa Toyota Motor Sales, which saw sales boom before the tax hike, then plunge 22.7% year on year in October and 9.1% in November.

Business sentiment had already been declining since the start of the year amid the bruising U.S.-China trade war, which has disrupted business operations across Asia and hammered China's economy, the engine of global growth.

The economy is widely expected to contract in the October-December quarter, following a 1.8% expansion in July-September.

The index measures the percentage of companies that say business conditions are favorable, minus those that say the opposite. It is considered to be an early indicator of Japan's economic health and possible monetary policy shifts.

Capital investment across industries is set to increase 3.3% in the current fiscal year ending March, the survey found. In the previous September survey, capital investment was expected to grow 2.4%.

Growth in business investment reflects the need for labor-saving investment in Japan amid worker shortages. Dai-ichi Life's Kumano thinks that one-off factors may be buoying the economy, such as Japan's hosting of the Rugby World Cup.

The government of Prime Minister Shinzo Abe approved a major spending program worth 13.2 trillion yen ($121 billion) earlier this month to spark the sluggish economy.

Whether the BOJ will follow the government's lead and further relax its already loose monetary policy is unclear. The central bank currently guides short-term interest rates to minus 0.1% and 10-year Japanese government bond yields to around zero.

This Tankan was overshadowed by news of a possible breakthrough in the U.S.-China trade war. According to Izumi Devalier, head of Japan economics at Merrill Lynch Japan Securities, the key takeaway is that the current Tankan may not impact the market as much as usual owing to reported progress in the U.S.-China trade war.

"The latest Tankan is not a decisive input since the BOJ signaled loud and clear at the October monetary policy meeting that it will look through weakness in near-term data and stick to a prolonged wait and see stance, while the government has preempted bad data by announcing its economic stimulus package," Devalier said.

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