But experts noted while the data showed lingering concern, it did not reflect the relief over a truce reached over the weekend in the damaging US-China trade war.
The central bank’s July Tankan report — a quarterly survey of about 10,000 companies — showed a reading of 7 — against market consensus of 9 — among major manufacturers, a steep fall from 12 in the previous quarter.
The latest indication of Japan’s economic health comes after the summit of the Group of 20 leading economies, where US and Chinese leaders agreed to resume trade talks, easing tensions that have bruised the global economy.
The second consecutive quarterly fall comes as “the Japanese manufacturing sector has been affected by weakening business confidence due to China-US trade frictions and a slowdown in the Chinese economy,” as well as a decline in IT demand, Naoya Oshikubo, Senior Economist at Sumitomo Mitsui Trust Asset Management (SMTAM), said in a commentary.
“Automotive companies have been hit the hardest as global sales have been sluggish and there is a sense of caution ahead of the US-Japan trade talks given that the main point of contention is the car industry,” Oshikubo added.
The index for non-manufacturers rose to 23 from 21 in the previous quarter.
The Tankan report, the broadest indicator of how Japan Inc. is faring, marks the difference between the percentage of firms that are upbeat and those that see conditions as unfavourable.
Japan’s economy grew a modest 0.6 percent quarter-on-quarter in the January-March period, the second succesive expansion after growth of 0.5 percent in the fourth quarter of last year.
Analysts have warned that US-led trade wars could be a major risk factor for the Japanese economy still struggling to win a long battle against deflation.
But US President Donald Trump said trade negotiations with China were “back on track” after “excellent” talks Saturday with his Chinese counterpart Xi Jinping in which Washington reportedly agreed to hold off on new tariffs.
And the Tankan result “does not reflect the latest development on the weekend,” Seiichi Suzuki, senior market analyst at Tokai Tokyo Research Centre, told AFP.
“If the survey was taken today or tomorrow, the outcome would be different.”
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© Agence France-Presse