The Japanese business confidence in economic growth has worsened in Q1 2018 for the first time in two years, as rising raw materials and rising labor costs have compounded the otherwise robust recovery. A strong Japanese yen and rising fears of a trade war could further undermine the optimism of business, especially if escalation of threats to retaliation.
However, few experts expect economic recovery to slow down as business confidence remains at its highest level in a decade, and companies are planning to increase their capital spending.
The fears of a global trade war have so far had a limited effect on business attitudes, but depending on the development of US trade policy, protectionism can put a strain on prospects.
The index Tankan Large Manufactures, which measures the confidence of large manufacturers, dropped by 2 points to 24 points in March, against market expectations for 25 points.
The business confidence of companies in non-productive sector declined by 2 percentage points to 23 points, declining for the first time in six quarters.
This should not be seen as a turning point for the Japanese economy, although mood worsens slightly.
Major manufacturers expect the dollar to move around 109.66 JPY on average in the financial year, which begins in April. This is much lower than the current levels of about 106 JPY per USD. If the appreciation of the yen continues, manufacturers will be forced to reduce their profit forecasts.
The labor shortages are also getting worse on moods, as economic recovery and the declining working-age population have led to the lowest levels of unemployment in 25 years.
The slow wage growth and companies’ reluctance to raise prices have kept inflation well below the Japanese central bank’s target of 2%.