Business confidence in Japan slipped in Q2 2018

Large manufacturers' worries intensify over trade frictions and geopolitical risks.

Business confidence of large manufacturers in Japan slipped. Based on the Bank of Japan’s quarterly Tankan survey, it saw a three-point slip in the Diffusion Index (DI) to 21 from 24 in March. 

The manufacturers’ decline could be mainly due to trade frictions and geopolitical risk, according to JP Morgan senior economist Hiroshi Ugai.

Meanwhile, small manufacturers recorded a one point DI decline to 14 whilst the business conditions DI was unchanged for non-manufacturers.

“Overall, the business activity is still relatively upbeat despite weaker business confidence, and we maintain our view that the economy regained momentum in 2Q and its growth rate will be converged to 1.5%ar through 2H 2018, above-potential growth of around 1%. ” Ugai said.

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The economist thinks that both the business condition DI of large and small manufacturers fell consecutively due to decline in the autos and basic materials sector which includes oil, aluminium, and steel.

Meanwhile, he also noted the large non-manufacturers’ DI increased from 23 to 24 in June with a decline of DI in retail sales and an increase of DI in household services.

“The firms’ perception of labour and capacity shortage have continued, supporting our view that capital expenditure (capex) would accelerate this year unless further decline in business sentiment due to intensified trade frictions appears,” the economist concluded.