Japanese firms tread with caution amidst 'deteriorating' business sentiment

There was weakening of business sentiment as indicated by the sharp decline in manufacturers’ production forecast for the survey month of May, says DBS.

Here’s more from DBS Group Research:

The economic data for May to be released this week will likely dampen the earlier optimism about Japan’s post-quake recovery and reignite concerns over slowdown. May industrial production (due Friday) is expected to fall about -3% MoM sa (consensus: -2.8%). The destocking pressures have increased in the manufacturing sector, with the inventory to shipment ratio rising to the highest level seen since May11 (the period following the March 2011 earthquake).

Business sentiment should have also deteriorated in May because of the financial market turmoil, making firms more cautious when deciding their production and investment plans. The weakening of business sentiment was indicated by the sharp decline in manufacturers’ production forecast for the survey month of May (-3.2%).

CPI growth in May (due Friday) is likely to drop to 0.4% YoY (consensus: 0.2%), down from 0.5% in April. The pickup in consumer prices earlier this year reflected the surge in energy prices, and a smaller-than-expected output gap in the domestic economy. As crude oil prices have fallen since May, the downward pressures on headline CPI should have reemerged. Japan’s core CPI only excludes fresh food and still includes energy, thus it could also be depressed by lower oil prices.