Rising raw material and energy prices have again put pressure on Japanese producer sentiment. However, economists expect sentiment to pick up again in the next few months due to stronger global demand.
Based on data from the Tankan Index released on Wednesday (12/January), Japanese producer sentiment reportedly declined. The sentiment index weakened from +22 to +17, reflecting economic conditions that are currently facing pressure from high raw material costs and energy prices.
The Tankan Survey conducted a poll of 502 large and medium-sized Japanese companies. Around 254 companies gave a less positive response and said that their condition was still being suppressed by commodity inflation. Meanwhile, the remaining 248 gave a more optimistic view as global demand began to solidify.
The increase in raw material and energy costs did indeed contribute significantly to the decline in Japanese producer sentiment in early 2022. The reason is that the price of raw materials is still high, causing profit margins to be further cut. On the other hand, producers have little choice but to let their profit margins shrink rather than pass the price increase on to Japanese consumers who have been very price sensitive.
"Market demand conditions have continued to improve, (however) soaring prices for raw materials and fuel have put pressure on our profits," a manager for a glass and ceramics maker said in a Tankan survey.
Although the impact of high raw material costs is still a burden, the producer sentiment index is expected to rise to +29 in April. This forecast is based on strong prospects in the metal products and automobile and motor vehicle manufacturing sub-sectors.
USD/JPY did not react much after the release of the Tankan data this morning. Against the Yen, the US Dollar was up 0.05 percent and trading at 115.34 at press time. Although still bullish in the long term perspective, USD/JPY has not fully recovered from the sharp correction that formed last weekend.
BoJ Governor Optimistic Inflation Will Increase Gradually
Separately, Haruhiko Kuroda said that consumer inflation is expected to increase gradually following rising energy costs and global demand recovering this year.
"Japan's economy is improving as a trend, although in general economic conditions are still fragile due to the pandemic," said the governor of the Bank of Japan.
Japan is indeed one of the slowest developed countries to recover from the effects of the pandemic. Domestic demand and the trend of rising wages are still fragile, so the economic recovery is relatively unstable. Regardless of these conditions, the Japanese economy is projected to grow in the first quarter of 2022 even though it is overshadowed by the spread of the Omicron variant and rising commodity prices.
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