Japan survey shows improved business sentiment

TOKYO (AP) — Japanese manufacturers are increasingly optimistic over the business outlook for the world's third-largest economy, according to a survey released Tuesday in advance of the expected approval of a sales tax increase.

Results from the Bank of Japan's "tankan" quarterly survey showed large manufacturers were especially upbeat, with a reading of positive 12, up from 4 in the July survey.

Prime Minister Shinzo Abe was waiting for the survey's release to go ahead with a long-anticipated decision on increasing the sales tax next year to 8 percent from the current 5 percent.

He was expected later in the day to announce the Cabinet's approval of that plan, along with tax breaks and other stimulus meant to counter the dampening effect on consumer demand that is expected to follow the tax hike's implementation next April.

Higher taxes are considered crucial if Japan is to begin reining in its public debt, which at more than twice the size of the economy is the world's highest at over 1 quadrillion yen ($1 trillion).

The tankan's results contrast, however, with data for August showing higher unemployment and lower household spending. Industrial output fell 0.7 percent from the previous month after a 3.4 percent jump in July, according to the Ministry of Economy, Trade and Industry.

Improved hiring and wages are needed to spur a rebound in consumer spending to help underpin a sustained recovery after years of stagnation.

"A key reason for the weakness in consumer sentiment is presumably the surge in inflation while wage growth remains subdued," Capital Economics said in a commentary that forecast growth would slow in the current quarter.

It said that "risks to this forecast are slightly to the upside, but a slowdown will be hard to avoid."

Lower tankan readings imply more pessimism. The tankan showed sentiment of all enterprises improved to 2 from previous survey's minus 2. But the sentiment for all large enterprises, which includes nonmanufacturing, remained at minus 2. For small manufacturers, the index was at minus 9, up from minus 14.

Since taking office late last year, Abe has sought to jar the economy out of the doldrums with a combination of ultra-easy monetary policy and hefty government spending. He has also promised to promote reforms, such as deregulation of some sectors, meant to boost Japan's longer-term competitiveness — most of which have yet to be enacted.

Meanwhile, the weakening of the Japanese yen as the central bank has flooded the economy with cash from asset purchases has raised costs for both households and businesses.

By "reflating" the economy, Abe hopes to break out of deflation that has discouraged investment by companies facing shrinking markets, in the long run, as the population shrinks due to aging and a falling birth rate.

The economy grew 3.8 percent in April-June after recovering from recession late last year. But it is expected to slow as boosts to public spending announced earlier in the year wind down. Economists expect a boost from "front-loading" of purchases by businesses and individuals ahead of the tax hike, followed by a blow to growth from higher prices and taxes over the next few years.

Abe had the option to shelve or delay the tax hike, approved by the parliament a year ago. But that would have required a significant deterioration in the economy.

He could also have opted for a more gradual approach, raising taxes by 1 percent a year over three years. However, the Finance Ministry and central bank had pushed for faster progress on improving the nation's finances.

Japanese companies have boosted investments, but mainly in overseas markets. Such trends are not reflected in the tankan, which measures only domestic conditions. It showed plans for fixed investment, including land purchases, falling slightly for both large and small manufacturers, though it increased for nonmanufacturing industries.

Production capacity and employment conditions also fell.

A separate survey by the Japanese financial newspaper Nihon Keizai Shimbun showed a large share of companies, 44.4 percent, expected to boost overseas production. Much of the expansion is focused on fast-growing Southeast Asian markets.