By Makiko Yamazaki

Business Sentiment Declines in Japan

TOKYO (Reuters) – Japanese manufacturers' business sentiment soured further in December amid worries over U.S. protectionist policies and China's economy, marking the first time pessimists outnumbered optimists in 10 months, according to the Reuters Tankan survey.

Key Findings

The dip in business confidence may impact the Bank of Japan's forecasts for a sustainable 2% inflation target driven by higher wages and consumption, raising concerns about future interest rate hikes.

The poll, which surveyed 505 major non-financial firms, revealed that sentiment among manufacturers dropped to -1 in December from +5 the previous month, marking the first negative reading since February. An expected rebound to +5 is anticipated by March.

The Reuters Tankan indexes measure the difference between the percentage of optimistic and pessimistic responses. A negative reading indicates that pessimists outnumber optimists.

Survey Details

• Participants: 236 firms surveyed anonymously between November 27 and December 6.
• Affected Industries: A variety of manufacturing sectors reported declining confidence, particularly in electronics, machinery, steel, and nonferrous metals.

Many respondents expressed concern regarding potential tariffs from U.S. President-elect Donald Trump, which could disrupt international trade. A machinery firm manager stated, "We are seeing many investment projects being delayed as a wait-and-see mood has grown since Trump's election victory."

Fears of an escalating trade war between the U.S. and China are increasing caution among clients. An automotive industry manager mentioned ongoing weakness in China’s sales linked to a prolonged property crisis and sluggish consumption.

Service Sector Growth

In contrast, the service sector index improved to +30 in December from +19 the previous month, expected to rise to +32 in March. A services manager noted, "Strong inbound tourism is boosting our business."

Economic Overview

Japan's GDP growth for July-September was revised up to an annualized 1.2%, supported by a lesser-than-expected decline in capital expenditures. However, analysts highlighted a downward revision in consumption, indicating the fragile nature of the recovery.