TOKYO (Reuters) - Japanese manufacturers’ mood improved further in June and its gauge reached its highest level in more than two years, a Reuters poll showed, a sign the government’s reflationary policies are continuing to bolster business morale despite recent market turmoil.
The monthly survey, however, showed that the seven-month improving streak was still more a reflection of high expectations for Prime Minister Shinzo Abe’s policy prescription of ultra-easy monetary policy, fiscal stimulus and some pro-growth reforms than a view of current business conditions.
“Although overseas economies are not performing so well, a positive impact from yen’s weakness is bigger than that for Japanese corporations,” said Yasuo Yamamoto, senior economist at Mizuho Research Institute.
“Improving outlook sentiment, especially among manufacturers, reflect firms’ expectations they will be able to benefit more from a softer yen.”
A recent stock market selloff, a yen spike, and volatility in the government bond market raised concerns about Abe’s formula for economic revival which assumes improvements in business sentiment will set off a virtuous cycle of rising investment, incomes, spending and economic output.
A loss of confidence would be a blow for Abe’s policies and his ruling bloc that must decisively win July’s upper house elections to cement its grip on power and implement policies smoothly.
But while few company officials canvassed by Reuters voiced concerns about market swings, many complained about still-sluggish demand and weak capital spending, noting the effects of “Abenomics” had yet to materialize.
“Things are turning for the better gradually due in part to a weak yen, but levels of sales and orders we receive remain low,” said one machinery maker in the June 3-17 poll of 400 big and medium-sized firms, of which 304 have responded.
“The government has taken various steps aimed at beating deflation but we don’t feel there’s much momentum in the economy’s recovery,” one electric machinery maker said.
The manufacturers’ sentiment index rose by 8 points to plus 15 in June in the Reuters survey which is strongly correlated with a closely watched quarterly Bank of Japan tankan survey.
The Reuters index marked its second positive month, which shows optimists outnumber pessimists and hit its highest level since March 2011, just before a devastating earthquake struck the country’s northeast. The index is seen up further to plus 23 in September.
Compared with three months ago, the manufacturers’ index was up 26 points, suggesting a marked improvement in the BOJ survey due on July 1.
The BOJ’s last tankan published in April showed manufacturers’ sentiment improved in January-March for the first time in three quarters, and it was seen rising further in the second quarter.
The rise in the Reuters Tankan’s manufacturers’ index was driven in part by big improvements among exporters such as car manufacturers and steelmakers.
The service sector gauge rose 1 point to plus 20 in the June survey to hit its highest since May 2007 and is seen rising to plus 29 in September led by such sectors as real estate and construction.
Japan’s economy grew at an annualized 4.1 percent rate in the first quarter, led by firm consumption and a rise in exports, but capital spending slid for a fifth straight quarter.
That weakness in spending continued in April, when core machinery orders fell for the first time in three months as companies remained hesitant to boost capital spending.
Tokyo's Nikkei share average .N225 entered bear market territory last week, having plunged more than 20 percent from a 5-1/2-year high hit on May 23, but since then it has recouped some of the losses in nervous trading.
Also last week, the dollar hit its lowest level against the yen since April 4 when the BOJ launched an intense burst of stimulus, which has contributed to the volatility in bond markets.
Additional reporting by Kaori Kaneko; Editing by Eic Meijer and Shri Navaratnam