Japan economic surveys show recovery in manufacturing

Japanese manufacturers are planning to increase investment as demand for exports recovers, surveys showed Monday in upbeat news for Prime Minister Shinzo Abe as he copes with a major political setback following his party's defeat in Tokyo metropolitan elections.

The Bank of Japan's quarterly "tankan" survey of business conditions showed the main index for business conditions of large manufacturers rose in the April-June quarter for the third straight quarter, from 12 to 17. Other large companies also were upbeat.

In other positive news for the world's third largest economy a separate survey of factory purchasing managers also indicated the outlook improved in June, for the 10th consecutive month.

Stronger demand from China and other Asian markets is driving a recovery in exports that has stretched the capacity of some manufacturers and other employers, though forecasts suggest conditions will deteriorate in coming months.

The Nikkei Japan Manufacturing Purchasing Managers' Index was at 52.4 in June. That was lower than May's 53.1, but above the 50-level cutoff between contraction and expansion on a scale of 0 to 100.

"Planned new product development and launches, alongside strengthened market activity and demand, were widely noted as factors that should support growth in the next year," the report said.

The BOJ's tankan showed large companies anticipated raising their investment in factories and equipment by 8 percent in the current fiscal year from the year before, taking into account the improved outlook. However, smaller factories and other companies — which provide the vast majority of jobs in Japan — plan to reduce investment by about 20 percent overall.

"Rising capacity shortages also point to a continued recovery in business investment," Marcel Thieliant of Capital Economics said in a commentary. He noted that manufacturers reported capacity shortages for the first time since 2008. Already severe shortages of workers are also worsening, the survey showed.

The improvement in the economic outlook comes at an opportune time for Abe, whose Liberal Democratic Party suffered an embarrassing defeat in the Tokyo metro elections on Sunday.

Tokyo Gov. Yuriko Koike's new party, the Tokyoites First party, trounced LDP candidates as Tokyo voters showed dissatisfaction with Abe over recent scandals and gaffes.

Abe took office in late 2012 vowing to vanquish deflation and put economic growth on a sustainable footing with a combination of wide-reaching reforms, massive monetary stimulus and public spending.

So far, growth has been middling, and the main lifeline for the economy has been monetary easing in the form of huge injections of cash into the economy through government bond purchases by the Bank of Japan. Inflation has remained subdued, partly due to weaker crude oil prices, and consumer demand lackluster, thanks to weak growth in wages.