Most Japan firms see no business expansion in China next year

TOKYO: Japanese firms are deeply pessimistic about near-term growth prospects in China, with 79 percent saying they do not expect to expand business there next year, a Reuters poll showed.

The poll points to mounting concern about the outlook for Japan’s biggest trading partner as it heads for its weakest growth in a quarter of a century, as well as the fallout for an export-reliant Japanese economy seeking to scramble out of recession.

“The Chinese economy may lose a lot of steam in 2016 as economic anomalies, particularly in inland areas, suddenly come to the fore,” wrote a manager at a wholesale firm in the monthly Reuters Corporate Survey.

“China is in much worse shape than the media reports,” commented another manager at a services company.

The survey, conducted Nov. 20-Dec. 2 for Reuters by Nikkei Research, also showed Japanese firms were upbeat about business expansion in the United States and Asia’s emerging economies next year although sentiment was mixed about domestic prospects.

Separately, Japanese companies look set to resist calls from Prime Minister Shinzo Abe to actively use up some of their cash piles to boost wages and capital spending, the survey showed, with 74 percent saying their pay and investment plans will be in line with what has been done in previous years.

The survey polled 514 big and medium-sized firms, of which most questions garnered between 230 and 250 responses. Managers respond on condition of anonymity.

The results on China flesh out views in last month’s survey in which three-quarters of Japanese firms said they expect the slowdown in the world’s second-largest economy to persist for more than a year. At that time, 44 percent of manufacturers also said they were undershooting their business targets due to China’s economy.

But Hidenobu Tokuda, senior economist at Mizuho Research Institute, said he thought that Japanese firms were being overly pessimistic about China’s near-term outlook.

“Over time, there will be a correction in sentiment,” said Tokuda, who reviewed the survey results. “China must demonstrate its ability to manage the shift toward enhanced manufacturing productivity and a consumption-led economy to win confidence.”

More Japanese firms were downbeat about prospects for Europe which is struggling with its biggest refugee crisis since World War Two and has been hit with Islamic State attacks. Eighty-three percent of companies said they did not expect to expand business there next year.

But 63 percent of companies said they expect to build their business in the United States, set to be the main engine of global growth in 2016, while 65 percent said they expect to expand in developing Asian economies.

“Demand for agricultural machinery in Asia remains high and we expect demand to strengthen,” wrote a manager at a machinery maker.

On Japan, 57 percent of firms said they did not expect to expand their business, although non-manufacturers were more upbeat, with close to half saying they expect to grow domestically. For 2016, the IMF has forecast 6.3 percent economic growth for China, 2.8 percent growth in the United States, 1.6 percent growth for the euro zone and 1 percent growth in Japan.

Yen weakening: Japanese firms believe the yen is likely to fall further to least 13-year lows against the dollar next year, a Reuters poll showed, a move that would exacerbate pain for importers and potentially create headaches for policymakers. Amid expectations of an imminent US rate hike and monetary easing in Japan sometime next year, nearly 90 percent of companies in the Reuters Corporate Survey said they think the yen will fall to at least 125 to the dollar.

That compares with levels of 122-123 yen during the poll period of Nov. 20-Dec. 2, and roughly matches a 13-year low of 125.86 marked in June, after which central bank governor Haruhiko Kuroda said it was unlikely to fall further, effectively putting a floor under the currency. The survey, conducted for Reuters by Nikkei Research, also showed nearly half of the firms expect the yen to decline to 130 to the dollar or even lower – levels that are expected to sound alarm bells for policymakers.

“The weak yen has led to hikes in the prices of goods and wages have not caught up – hurting households’ purchasing power, so the yen at 130 or more would do more harm than good to Japan Inc,” said Hidenobu Tokuda, senior economist at Mizuho Research Institute, who reviewed the survey results.

Yen weakness is a boon for many exporters as it inflates the value of earnings garnered abroad and makes exports more competitive. But it also pushes up energy costs, as well as prices of other imports that are painful for companies reliant on raw materials or overseas parts.

“If US interest rate hikes drive further yen weakening, that would be negative for our business which depends highly on purchasing from overseas,” wrote a manager at a manufacturer. The yen has lost over a third of its value since late 2012, due in large part to bold monetary stimulus since Prime Minister Shinzo Abe returned to power. But at the same time, the country’s sensitivity to yen weakness has jumped since the 2011 Fukushima disaster led to the shutdown of nuclear reactors, costing the country some $24 billion in extra fuel imports annually.

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