The Bank of Japan said Wednesday that business sentiment among major Japanese manufacturers improved for a fifth straight quarter, even as the central bank pushed its benchmark interest rate to 1% last month, a three-decade high that puts the squeeze on everyone below the boardroom.
Who Gets the Bill
The Tankan survey, released Wednesday, showed the diffusion index for major manufacturers rising to 22 from 17 in the previous quarter. The index for large non-manufacturers, such as services, edged up to 37 from 36. The Bank of Japan uses the survey as an indicator of companies foreseeing good conditions minus those feeling pessimistic. That’s the language of the apparatus: confidence measured from above, while the costs land somewhere else.
Higher fuel prices because of the Iran war have added to inflationary pressures in Japan. Crude oil prices have fallen since the United States and Iran agreed on an interim deal to end the war, but the damage has already been done. Japan imports nearly all of its oil and gas, and the yen’s recent decline to near a 40-year low has added to those concerns given recent high oil prices. The U.S. dollar was trading at about 162 yen on Wednesday.
The Central Bank Tightens the Screws
Last month, the Bank of Japan raised its benchmark interest rate to 1%, citing challenges stemming from a weak Japanese yen and higher prices. The central bank called that a move to normalize monetary policy after decades of keeping interest rates near or below zero. For the people living with higher prices and a weaker currency, that normalization arrives as another command from above.
The weak yen has raised the value of exports’ earnings when converted into yen, helping Japan’s giant exporters. But that benefit is being countered by rising energy prices. The gains are concentrated. The pain is spread out.
Analysts said Japan’s economic indicators, such as investments, remain relatively strong despite longer-term problems such as a chronic labor shortage due to an aging and declining population. Those figures may comfort the institutions that track them. They don’t erase the pressure building underneath.
What the Numbers Hide
Amova Asset Management Chief Global Strategist and Chief Economist Naomi Fink said, “Sales remain firm, especially for large enterprises, but profits are expected to weaken,” and “Fixed investment plans are strong for large and mid-size firms but less so for small firms.” That split says plenty. Big firms keep their footing. Smaller firms get less room, less cushion, less mercy.
The Tankan’s rise to 22 for major manufacturers and 37 for large non-manufacturers shows sentiment improving inside the corporate ranks, but the same report sits beside higher fuel prices, a near 40-year low for the yen, and a central bank rate hike to 1%. The people at the bottom don’t get to vote on any of that. They just absorb it.
Japan’s giant exporters benefit when a weak yen boosts the value of overseas earnings converted back into yen. Meanwhile, Japan imports nearly all of its oil and gas, so higher energy prices hit households and businesses that don’t have the same insulation. The structure is plain enough. The winners are protected by scale, while the losses move downward through the economy.
The Bank of Japan’s effort to normalize monetary policy after decades of near-zero rates may sound technical in the language of finance. On the ground, it means the central bank is still deciding the terms of life for everyone else, one rate hike at a time.