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UPDATE 2-Tax hike hurts Japan business mood more than in 1997-BOJ tankan
April 1, 2014 / 4:32 AM / 4 years ago

UPDATE 2-Tax hike hurts Japan business mood more than in 1997-BOJ tankan

* Big manufacturers' DI +17 vs f'cast +18-tankan
    * Big non-manufacturers' DI +24, matches f'cast
    * FY2014/15 capex spending plan slows from previous yr
    * Survey keeps BOJ under pressure for further easing

 (Adds analyst quote, details)
    By Leika Kihara and Tetsushi Kajimoto
    TOKYO, April 1 (Reuters) - Japanese business sentiment
barely improved in the three months ending March and the
corporate outlook is now considerably weaker than when Japan
last raised its sales tax in 1997, the Bank of Japan's tankan
survey showed on Tuesday.
    The findings highlight the daunting challenge facing Prime
Minister Shinzo Abe in his quest to increase the consumption tax
while simultaneously rescuing Japan from years of deflationary
    The headline index for big manufacturers' sentiment rose by
one point from three months ago to plus 17, the BOJ's closely
watched survey showed, marking the fifth straight quarter of
improvement but slightly short of a median market forecast of
plus 18. The rise was smaller than a 4-point gain in the
previous survey in December.
    Big service-sector sentiment also improved, by four points
to plus 24, matching the median market forecast, as consumers
rushed to beat the April 1 sales tax hike.
    But crucially, both big manufacturers and non-manufacturers
expect conditions to worsen in the three months ahead, the
tankan showed, as they brace for a slump in spending after the
tax hike that comes as exports remain sluggish.
    The outlook index for big manufacturers worsened 9 points to
plus 8, more than a 8-point decline when Japan previously raised
the sales tax to 5 percent from 3 percent in 1997.
    The outlook indices for big non-manufacturers, as well as
for small manufacturers and non-manufacturers, also worsened at
a faster pace than in 1997, underscoring the alarm companies
feel about the potential effects of the tax hike.
    Big firms expect to increase capital spending by just 0.1
percent in the new financial year starting this month, compared
with a median market forecast for a 0.2 percent rise -- a marked
slowdown from a 3.9 percent increase in planned spending for the
fiscal year that ended in March.
    The data will keep alive market expectations the BOJ may
ease policy further in coming months if the pain from the tax
hike proves to be much worse than estimated, analysts say.
    "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 chance of further BOJ easing may have risen a bit but
the tankan alone won't be a trigger for action. The bank will
probably wait to see more evidence on how much the tax hike
actually hurts demand," he said.
    Growth in the world's third-largest economy slowed in the
final quarter of last year as the effect of Abe's reflationary
policies began to fade. Analysts expect the economy to contract
in April-June due to a pullback in consumption after the tax
hike, before returning to moderate growth in following quarters.
    A Reuters poll showed analysts expect the BOJ to ease again
by July, despite reassurances by the bank the economy can
withstand the tax hike without further stimulus. 
    "Big companies are very worried about what will happen after
the sales tax hike. Memories of the last sales tax hike in 1997
are still in the back of many corporate executives' minds," said
Yasuo Yamamoto, senior economist at Mizuho Research Institute.
    Back in 1997, Japan slipped into recession as the tax hike
coincided with domestic banking-sector woes and the Asian
financial crisis. The BOJ argues that this time is different as
Japan's banking sector remains healthy and solid U.S. demand
will offset the weakness in emerging markets.
    The BOJ has stood pat since deploying an intense burst of
stimulus in April last year, when it pledged to double base
money via aggressive asset purchases to accelerate consumer
inflation to 2 percent in two years.
    The tankan survey will be among data the BOJ board members
scrutinise when they meet for a rate review next week. The
central bank is widely expected to keep monetary policy steady
at the meeting, preferring to wait at least a few months to
evaluate out the degree of pain from the sales tax hike.
    The tankan's diffusion index (DI) is calculated by
subtracting the number of firms which say business conditions
are worse from those which feel they improved. A positive
reading means optimists outnumbered pessimists.

 (Additional reporting by Stanley White; Editing by Eric Meijer)

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