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Economy

Japan's manufacturing outlook set for plunge in BOJ Tankan

Private economists see 5-point drop as China slump drags on exports and output

Mount Fuji is seen past a factory area in Yokohama, near Tokyo. Economists predict manufacturers' outlook will slide by the most since March 2016.   © Reuters

TOKYO -- Sentiment among big manufacturers in Japan is expected to worsen sharply in the Bank of Japan's forthcoming Tankan survey, likely dampened by a slump in output and exports stemming from the Chinese economic slowdown.

Forecasts from 19 private-sector research firms, aggregated Friday by Nikkei group company QUICK, suggest that an index gauging large manufacturers' optimism will drop 5 points from December to 14 in the March survey, due out April 1. This would mark the first slide in two quarters and the worst since the 6-point drop of March 2016.

The survey of roughly 10,000 companies of all sizes throughout Japan informs the BOJ's monetary policy and is watched keenly by market players. The three Tankan surveys through September each showed sentiment among large manufacturers declining no more than 3 points as they worried over the impact of the Sino-American trade war and a series of natural disasters that battered Japan last year.

"The major slump in China-bound exports will severely worsen" big manufacturers' sentiment for the March survey, predicted Shunsuke Kobayashi of the Daiwa Institute of Research. Electrical machinery and production equipment are widely expected to take a particularly strong hit.

Sentiment at large nonmanufacturing companies, meanwhile, looks set to slide by a relatively gentle 2 points to 22, likewise declining for the first time in two quarters.

On top of a rise in labor costs due to a worker shortage, "the manufacturing slowdown is expected to impact sectors like wholesaling, plus transport and mail," said Ryutaro Kono of BNP Paribas Securities.

The diffusion index measuring business sentiment is obtained by taking the percentage share of companies expressing a positive outlook and subtracting the share of those showing pessimism.

Capital expenditure plans for fiscal 2019 also look set to weaken by 0.7% among big businesses in all sectors. Any drop would mark the first since fiscal 2016.

Japan's private-sector machinery orders -- a weather vane for equipment investment -- fell on a monthly basis for the third straight month in January, excluding orders for ships and from electric power companies, Cabinet Office data showed March 13. The BOJ is wary that a drop-off in sentiment could ripple out to impact capital spending.

But for now, the central bank's main scenario has economic conditions improving both at home and abroad in the year's second half. And even economists' prediction of 14 would best the March 2016 reading by 8 points. The next point of attention will be what the BOJ forecasts for the economy and inflation in its late-April outlook, based on the Tankan's findings.

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