The Economy

Double Trouble

Japan’s malaise continues, but the slowdown in China poses a greater risk to Asian economies.
David W. OwensMay 4, 2016

The global economic outlook appeared to be taking a turn for the worse in the first quarter of 2016, judging from the latest Duke University/CFO Magazine Global Business Outlook Survey. Especially noticeable was a sharp drop-off in optimism recorded by Japanese companies, but executives in many countries also continued to gauge their own outlooks in relation to China.

Overall, little or no inflation was expected in any of the three segments constituting the Asia region in the survey — China, Japan, and all other countries in Asia. The last mentioned was dominated by India, which represented 37% of the respondents in the segment. The next-largest contingents were from Singapore (12%) and the Philippines (11%), while no other country topped 10% in terms of representation.

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Regardless of where they were located, first-quarter respondents clearly were nervously eyeing a disappointing year for China’s business and economic performance. In a testament to the economic muscle that China now flexes, executives throughout Asia identified the slowdown in China as presenting the greatest risk by far to their own economies, potentially causing them to slide into recession. Other risks — such as currency valuations, political risk, and economic slowdowns aside from China’s — placed distant seconds, thirds, and fourths.

Japanese economy 16May_DD_p44In fact, the confidence of executives in China has been trending downward from quarter to quarter for the better part of a year. In each of the past three quarters, a little more than 75% of the survey’s respondents from Chinese companies reported that they were less optimistic about the Chinese economy than they were the previous quarter.

This quarter, finance executives in Japan joined their Chinese counterparts in expressing their pessimism, with 64% saying they were less optimistic about the Japanese economy. This represented a substantial rise from the two prior quarters, when the percentage was in the 30s. It was an even more worrying reversal from year-ago levels, when 61% of respondents from Japan said that they were more optimistic, not less, about their economy.

In contrast, reports from the rest of Asia held fairly steady in the first quarter of the year. At 46% of the respondents, the optimistic contingent continued to hold sway over those who were less optimistic (35%).

The trends were similar when respondents were asked to weigh in on their optimism about the prospects for their individual companies. A majority of executives from both China and Japan expressed doubts about their own companies’ future performance, while 55% of respondents outside of those two countries reported a rise in optimism about their companies.

Interestingly, the gloomy outlook in China was not reflected in the overall ratings Chinese respondents gave the economy or their own companies this past quarter. Although still 10 points lower than year-ago levels, Chinese executives’ level of economic optimism was 56.4 out of 100. This represented a rebound from the previous quarter’s 47.7 rating, and, combined with the stronger ratings seen in India and other Asian countries, helped pull up the region’s overall rating. The same held true for respondents’ own-company ratings.

Japanese economy 16May_DD_p45aPessimism in Japan

But in Japan, the bottom fell out of optimism ratings for both the economy and own-company performance. Economic optimism plunged to 44.5 out of 100, compared with the previous quarter’s 58.1, and own-company optimism fell to 47.5 from the previous quarter’s 57.2.

The pessimism in Japan was reflected in a greater reluctance to increase spending in key categories and a greater tendency to hold on to their cash. Twelve-month projections for capital spending came in at an anemic 1.8%, and planned spending on technology was similarly low, at 2.4%. Plans for advertising, marketing, and research and development were somewhat better, but still were much less robust than was seen six months ago. Meanwhile, executives from Japan reversed a two-quarter trend of lightening their balance sheets and expected cash to increase by 3.5% on average over the next 12 months.

Companies in other Asian countries were more willing to shed cash and spend in key categories — most notably in China, where respondents may have been looking to spend their way out of their recent doldrums. There, cash on the balance sheet was expected to decline by a substantial 6.3% over the next year, while spending plans in four categories — capital spending, technology, R&D, and advertising and marketing — all showed upticks from the previous quarter’s cautious forecasts.

In the countries outside of Japan and China, executives projected a much more modest decline of 1.7% in cash on the balance sheet. However, they matched their counterparts from China in terms of their projections for capital spending, advertising and marketing, and R&D. They also appeared confident enough to maintain technology spending at relatively high levels, in line with the trend seen throughout the past year.

Finally, Japan’s belt-tightening may also account for the nearly non-existent expectations (0.9%) for growth in wages and salaries over the next 12 months. Wages and salaries elsewhere in Asia, including China, were expected to rise much faster than inflation: by 3.7% in China and by 4.8% in India and the other Asian countries.

Japanese economy 16May_DD_p45bBut the outlook for employment is less rosy across the board. Projected full-time employment increases barely edged above zero in Japan and in the other Asian countries, while executives in China expected full-time employment would shrink by about 2%. Companies were not looking to shift employment into the temporary sector, either, with negative numbers posted in China, Japan, and the other Asian countries alike. Recovery in employment levels may have to wait for the rest of the world to catch up.

In the end, Japanese companies will still have to regain confidence in their government’s latest efforts to yank the country from the malaise it has suffered for more than a decade. But executives in the region — and indeed, around the globe — still look to China for the telltale signs that will influence their own futures.