Business Confidence on a Slide Due to Tax Increase Concerns

Japanese business sentiment inched up in the three months ending March, a central bank survey showed, but confidence is slated to weaken sharply as major manufacturers grow more cautious of the impact of the sales tax hike.

The headline index of confidence among large manufacturers rose by one point to plus 17 in the March quarter, according to the Bank of Japan’s closely watched tankan survey, revealed Tuesday. The figure reached its highest level since December 2007 but fell short of the median market estimate of plus 18.

Big service-sector sentiment also improved by four points to plus 24, matching the median market forecast, as consumers rushed to splurge ahead of the April 1 sales tax increase.

Both big manufacturers and non-manufacturers expect sentiments to worsen in the three months to come, forecasting figures to slip to plus 8 in the June quarter as they brace for a slump in spending after the tax hike, the tankan showed.

Big firms expect to increase capital spending by just 0.1 percent in the new financial year starting this month, Reuters reports, compared with a median market forecast for a 0.2 percent rise.

“The results were somewhat weaker than expected. Companies are cautious about the outlook mainly due to the tax hike and aren’t in the mood to boost capital spending,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

The consumption tax rise is a major challenge for Prime Minister Shinzo Abe’s administration, which has vowed to tackle Japan’s sluggish economy.

Economists remain hopeful despite the survey results.

“We had similar results in 1997 when Japan had its last sales tax hike, but in the following June survey, the sentiment wasn’t that bad,” Yuki Endo, an economist at Hamagin Research Institute said. “I believe in three months time we will be saying it wasn’t that bad. The economy will overcome the tax hike.”

By Maesie Bertumen

Image: “Tokyo tower” by sebastien batardy/Flickr

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