Confidence among Japan's biggest manufacturers dropped last quarter to its lowest level since Prime Minister Shinzo Abe kicked off his much-vaunted program to boost growth three years ago, a survey showed on April 1.
The poor reading on the Bank of Japan's closely watched Tankan report will heap pressure on policymakers to unveil more stimulus, as evidence of a slowdown in the world's number three economy piles up.
The report showed sentiment among major manufacturers came in at plus six in March, weaker than market expectations and way down from a plus 12 reading the previous quarter.
The survey of more than 10,000 companies is the most comprehensive indicator of how Japan Inc. is faring, and marks the difference between the percentage of firms that are upbeat and those that see conditions as unfavorable.
While there were still more upbeat producers than pessimistic ones, confidence has been on a steady decline owing to fears about China's economy and weak global growth.
Sentiment in the boardrooms of large non-manufacturing companies also fell, while big firms across a swathe of industries plan to cut capital spending, in a reflection of an economy that is losing steam.
"The pronounced drop in the headline index of today’s Tankan survey underlines that the recent strengthening of the yen has damaged business confidence and suggests that the Bank of Japan will announce more easing later this month," research house Capital Economics said in a commentary.
The BoJ launched an unprecedented monetary easing plan in early April 2013, a cornerstone of Abe's plan to bring an end to years of the deflation that held back growth in the once-powerhouse economy.
"(The Tankan) doesn't look very good -- it's become clear that the economy is weakening," said Kohei Iwahara, director of economic research at Natixis Japan Securities.
"We need a policy response, but the question is what."
Negative Rate Shock
In January, the bank shocked markets with a move to negative interest rates, effectively charging banks to store their excess reserves in the BoJ's vaults.
The move is aimed at stimulating lending to help kick-start the economy, but it was widely panned as a desperate bid to shore up Tokyo's faltering growth push.
Tankan comes as fresh data this week showed Japan's factory output plummeted in February at its sharpest pace since the aftermath of the 2011 Fukushima earthquake and tsunami disaster.It was the latest in a string of figures that have cast doubt on the effectiveness of Abe's program. The plan brought the yen down from record highs and made Japan's exports more competitive but that has not been enough to deliver consistent growth -- the economy shrank 0.3% in the last quarter of 2015.
The recent pick up in the yen -- a negative for exporters' profits -- has also threatened corporate Japan's bottom line. "Business conditions move in tandem with corporate profits," said Junichi Makino, chief economist at SMBC Nikko Securities. "The latest data reflect worries about corporate earnings in light of the high yen and drop on the stock market since the start of the year."
Tokyo's Nikkei 225 index on April 31 ended the first quarter as one of the worst-performing stock indices globally, dropping nearly 12% since January when global markets were pulverized by an eye-watering sell-off.
Plunging oil prices and worries about China -- a key driver of global growth -- sent world markets into a tailspin.
Japan's premier is now considering whether to hike the consumption tax again next year to help pay down one of the biggest debt loads among rich nations.
But the economy fell into a brief recession in 2014 after Tokyo hiked the tax for the first time since the late 1990s.
That downturn spurred the central bank to sharply increase its already massive bond-buying program -- effectively printing money to spur lending.
Copyright Agence France-Presse, 2016
