Business confidence among major Japanese manufacturers worsened for the second straight quarter in June, affected by rising energy and raw material costs amid Russia’s invasion of Ukraine and supply crunches caused by lockdowns in China, the Bank of Japan’s Tankan survey showed Friday.

The key index measuring sentiment among companies such as automakers and electronics makers dropped to 9 from 14 marked three months earlier. It was below the average market forecast of 13 in a Kyodo News survey.

The index for large nonmanufacturers, including the service sector, rose to 13 from 9 in the previous survey, seeing the first improvement since the December 2021 report, reflecting a recovery from the impact of the coronavirus pandemic.

The Tankan index represents the percentage of companies reporting favorable conditions minus the percentage reporting unfavorable ones.

Among major manufacturers, confidence in the auto sector fell further to minus 19 from minus 15 in March, while that in the production machinery segment declined to 34 from 43, hurt by higher material prices and lockdowns in China due to the COVID-19 pandemic.

“The impact of the lockdowns was felt in a wide range of sectors, including textiles, lumber and wood products, iron and steel and production machinery, said Shunsuke Kobayashi, chief economist at Mizuho Securities Co.

Although the deterioration in the auto sector was somewhat limited after having fallen sharply in the previous quarter, curtailment of auto production has dealt a blow to sectors that had planned to procure parts for automakers.

Automakers, including Toyota Motor Corp., have been forced to cut output due to difficulty procuring parts like semiconductors.

Russia’s war in Ukraine, coupled with the yen’s sharp falls against major currencies, such as the U.S. dollar and the euro, has sharply increased crude oil and commodity prices amid a spike in geopolitical risks and supply concerns. Russia is a major exporter of crude oil and natural gas.

Reflecting recent rising prices, surveyed firms expected the nation’s consumer price index to climb 2.4 percent a year later on average, higher than the 1.8 percent gain projected three months ago.

In the latest quarter, sentiment worsened in 12 out of 16 sectors among the manufacturers, while it improved for half of the 12 nonmanufacturing sectors, according to the survey.

Over the next three months, sentiment among major manufacturers is expected to rise slightly to 10, and that among major nonmanufacturers is projected to remain flat at 13.

For nonmanufacturers, sentiment among services for individuals covering travel and entertainment jumped to 18 from minus 14 and that for accommodations, eating and drinking services improved to minus 31 from minus 56, as Japan lifted anti-virus curbs and gradually eased entry restrictions on foreign travelers.

The improvement “reflects the demand that has built up over the last three years and a resumption of economic activities,” said Kobayashi, adding the recovery is expected to continue in services for individuals and accommodations and the eating and drinking services sectors.

Looking beyond the next several quarters, however, Kobayashi said there are uncertainties about the extent of the recovery.

“Inbound tourism has not fully recovered as China, which makes up a large portion of the demand, has not reopened,” he said.

From June 1, Japan doubled its cap on daily arrivals to the country to 20,000 and allowed most to forgo COVID-19 tests and quarantine periods. It also restarted visa procedures on June 10 to accept foreign tourists in stages, although they are limited to people arriving on guided tours from 98 countries and regions.

Companies in the Tankan survey expect the dollar to average 118.96 yen, far below the 137 yen line it reached earlier this week. The euro is projected at 131.60 yen for the current fiscal year.

The yen’s weakness has a mixed impact as it boosts exporters’ overseas profits when repatriated but inflates import costs.

The BOJ surveyed 9,313 companies, of which 99.3 percent responded between May 30 and Thursday.


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