TOKYO: Japan’s service-sector mood improved to a two-year high but the recovery among manufacturers stalled, according to a closely watched central bank survey – a sign rising raw material costs was weighing on the economy’s recovery from the pandemic.

       Big firms expect conditions to worsen ahead as high fuel prices and a weak yen push up import costs, reinforcing expectations Japan will maintain massive fiscal and monetary support to underpin a fragile economy.

       “Non-manufacturers’ sentiment got a boost from the end to pandemic curbs, while supply constraints hit manufacturers,” said Toru Suehiro, an analyst at Daiwa Securities.

       “Overall, business confidence lacks strength with both manufacturers and non-manufacturers expecting conditions to worsen,” he said.

       The headline index gauging big manufacturers’ sentiment stood at plus 18 in the final quarter of 2021, unchanged from the previous quarter and below a market forecast for plus 19, the Bank of Japan’s (BoJ) tankan survey showed yesterday.

       Rising costs and auto output disruptions hit industries such as non-ferrous metals, chemicals and machinery, it showed.

       By contrast, big non-manufacturers’ sentiment improved for the sixth straight quarter at plus nine, up from plus two in September and exceeding market forecasts of plus six.

       The index hit the highest level since December 2019, as the Sept 30 lifting of state of emergency curbs to combat the Covid-19 pandemic boosted morale among retailers.

       But the survey, conducted for a month through Dec 10, likely did not incorporate much of the recent spread of the Omicron variant, with nearly 80% of the replies coming in by Nov 29.

       Rising raw material costs add to uncertainty by squeezing profits of firms just emerging from the pandemic’s hit.

       An index gauging big manufacturers’ output prices rose to levels last seen in 1980, though the gauge for input prices was also at its highest since 2008, the survey showed, a sign firms may struggle to hike prices as much as needed to cover costs.

       Companies expect inflation to hit 1.1% a year from now, the tankan showed, marking the highest level since September 2015.

       Despite the murky outlook, companies plan to increase hiring and capital expenditure to deal with a chronic labour shortage.

       Big firms plan to increase capital spending by 9.3% in the year ending in March 2022, less than market forecasts for a 9.8% gain but rebounding from an 8.3% drop in the previous year.

       The tankan also showed corporate funding continued to ease, giving the BoJ scope to phase out emergency support deployed last year to combat a pandemic-induced credit crunch.

       Japan has lagged other countries in staging a strong rebound from last year’s pandemic hit, shrinking an annualised 3.6% in July-September due to weak consumption and output hit by a spike in infections and supply constraints.

       While analysts expect growth to bounce back in the final quarter of this year, some warn the emergence of Omicron clouds the outlook and may keep the recovery feeble next year.

       Separate data showed Japan’s core machinery orders rose in October for the first time in three months as service sector firms ramped up investment amid low Covid-19 infections, a welcome sign firms were spending and the broader economy was recovering.

       The world’s third-largest economy is set to post a solid rebound this quarter after a larger-than-expected contraction in July-September, although the outlook is currently blurred by uncertainties around the new Omicron coronavirus variant.

       Core machinery orders, a highly volatile leading indicator of capital spending in the coming six to nine months, rose 3.8% in October from the previous month, the Cabinet Office data showed yesterday.

       That compared with a 2.1% expansion forecast by economists in a Reuters poll and followed no change in September.

       Core orders from service-sector firms excluding ships and electrical utilities gained 16.5% month-on-month in October, led by transport and postal services that grew 170.1% due to large-scale orders for railroad vehicles.

       “As the coronavirus outbreak settled down, capital expenditure among a broad range of non-manufacturers grew,” a government official told reporters.

       Meanwhile, orders from manufacturers declined 15.4% from a month earlier, as decreasing demand from chemical firms offset growth from semiconductor-making equipment and production machinery companies.

       In a year-on-year basis, core orders rose 2.9% in October, the data showed, versus a 4.0% rise expected by economists.

       Companies’ capital expenditure slowed in the third quarter due to a global resurgence of Covid-19 outbreak, which particularly battered carmakers and other manufacturers dependent on parts supplies from Asian factories.

       While supply bottlenecks eased, the outlook on production and spending remained sluggish.

       The central bank is expected at this week’s policy review to debate whether to extend pandemic relief programmes beyond their current March 2022 deadline, although no change to its ultra-easy monetary policy is expected. — Reuters