MNI: BOJ Tankan: Key Sentiment Slips, Solid Capex Plans

Japan's business sentiment benchmark posted the first drop in four quarters over Q1, but the index for major non-manufacturer sentiment posted its second straight rise, the Bank of Japan’s March Tankan survey released Tuesday showed.

The diffusion index for sentiment among major manufacturers stood at +12 in March, down from +14 in December, the first drop in four quarters and the lowest level since March 2024. The index is likely to print at +12 in June.

A BOJ official told reporters high costs and gloomy overseas demand, in addition to concern over the impact of trade policies around the globe and uncertainty over the U.S. economy, had negatively impact sentiment.

The sentiment index for major non-manufacturers rose to +35 in March from +33 in December, for the second straight rise and the highest level since August 1991. The index is projected to fall to +28 in Q2. 

The sentiment index for smaller manufactures stood at +2 in March, up from +1 in December, for the third straight rise, and is expected to fall to -1 in June, while the benchmark for smaller non-manufacturers stood at +16, unchanged from the prior month. The DI is projected to fall to +9 in June.

CAPEX PLANS

The Tankan also showed major and smaller firms capital investment plans this fiscal year remained firm and above the historical averages, supporting the BOJ's view that the virtuous cycle from income to spending continues to work.

Major firm investment plans this fiscal year, key to a pickup in domestic demand, are projected to rise 3.1% y/y, above the historical average, while smaller firm's capex plans are expected to fall 10%, also above the historical average. Smaller firm capex plans tend to be revised up after the negative forecast at the beginning of fiscal year.

Major firm's capex plans for the fiscal year ended March 31 were revised down to +8.8% from 11.3%.

The labour shortage is impeding capex, resulting in a gap between implementation on a real basis in gross domestic product and plans on a nominal basis in the Tankan.