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Economy

Trump trade policy rattles Japanese manufacturers

Sentiment sinks for the first time in eight quarters in BOJ survey

Japanese manufacturers worry that U.S. protectionism and a strong yen will hinder exports.

TOKYO -- Japan's manufacturers are feeling less optimistic than three months ago amid protectionist U.S. trade policies, high commodities prices and a strong yen.

The Donald Trump administration's recent flurry of tariffs loom large as the Bank of Japan revealed Monday that business sentiment among major manufacturers had deteriorated for the first time in eight quarters.

"We will be monitoring the implications for the global economy from the trade issues Trump has set off," Mitsubishi Chemical Holdings President Hitoshi Ochi said. Tariffs on steel could have repercussions for "all trade between the U.S. and Japan," according to Kosei Shindo, president of Nippon Steel & Sumitomo Metal.

The central bank's quarterly Tankan survey shows how companies feel about business conditions currently and where they see conditions three months down the road. Sentiment is gauged using a "diffusion index" that subtracts the share of companies saying conditions are unfavorable from those saying they are favorable.

In the immediate term, climbing resource prices are a big cause for concern. U.S. oil futures reached a 38-month high of $66 per barrel in January. Copper touched a roughly four-year high on global markets at the end of 2017, and aluminum reached its highest price in five years and nine months around the same time. The relative share of companies in the basic materials sector saying that input prices are rising has grown compared with those seeing a decline. Yet conditions remain difficult for passing on the higher costs downstream. With the terms of trade deteriorating, sentiment has declined among companies in industries such as steel and nonferrous metals.

American trade policy could compound these troubles, and companies predict even worse conditions in three months. U.S. tariffs may create a glut of Chinese steel, for example, denting prices in Japan and elsewhere in Asia, according to a trade source. Similar concerns sent Chinese rebar futures sliding about 20% in March. Companies would find themselves in tough financial straits if input prices were to keep climbing even as product prices faced downward pressure.

The tariffs will also increase costs directly for companies such as tire maker Bridgestone, which imports steel cord into the U.S. to reinforce tires, according to Chief Financial Officer Akihiro Eto.

Strengthening in the yen has made manufacturers gloomier about the future as well. The Japanese currency is now hovering at about 106 yen to the dollar, compared with around 112 yen to the dollar at the start of 2018. Large manufacturers are assuming an exchange rate of 109.66 yen to the dollar on average for fiscal 2018, according to the Tankan report.

Companies' confidence in conditions three months later dropped sharply among industries most affected by a strong yen. The forward-looking diffusion index for automakers came in at just 13, compared with 22 for current conditions. Sentiment in the electrical machinery segment stands to decline as well.

Other businesses, including consumer companies that mostly serve the Japanese market, are more upbeat. "Earnings are strong, and more companies are raising base wages in this spring's labor talks," said Shigeru Kimoto, president of department store operator Takashimaya. But voices of caution are growing louder. "What if consumers start feeling uneasy about the economy at home?" said Sadanobu Takemasu, president of convenience store chain Lawson.

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