The Bank of Japan commissions four quarterly business confidence surveys as a tool to help it inform monetary policy. The Tankan business survey for June involved sampling the views of more than 4000 Japanese enterprises (consisting of approximately 2000 small and 1000 each of medium and large concerns). The June reading is the first since a sales tax increase came into force in April (the first such rise in 17 years) and so is being watched with particular interest.
June’s reading for business confidence dipped from 17 (in March) to 12, indicating that whilst businesses that are optimistic about the future still outweigh the pessimists, there has been a softening in sentiment since the last survey. A positive value indicates optimism whilst a negative value would indicate a negative sentiment. The slip in confidence is the first recorded by the survey in 18 months. On the brighter side, the survey revealed that large enterprises expect to raise their investment by 7.4% this financial year, underlining their optimism about the domestic economy.
The Takan findings come hard on the heels of Japan’s fastest pace of inflation, a dizzying 3.4%, in May – the highest rate seen for 32 years. Concerns have been expressed that the increased sales tax could stymy domestic demand since wages have not kept up with it, but this would not seem to be the case. The sales tax is due to increase to 10% next October - for comparison, the standard UK rate of “value added tax” is 20%.
Japan’s government believe it was compelled to raise the sales tax as a means of meeting the increasing demands for social security spending as the workforce ages. Japan has the largest GDP to debt ratio of any leading industrial nation at approximately 230% of GDP. If markets lost confidence in Japan’s ability to meet its obligations, borrowing costs would become astronomical.