On Wednesday, a survey published by Reuters revealed that about 40% of Japanese companies expect the central bank's recent policy adjustments to impact their financing. This underscores the sensitivity of Japanese businesses to changes in central bank policies and financing conditions, following years of expansive monetary easing.
There are indications that the Bank of Japan might be preparing to exit its ultra-loose monetary policy, heightening pressures on borrowing costs for the world's third-largest economy. This marks a significant shift from decades of ultra-low interest rates, as suggested by a manager of an electronics company, who stated that the central bank's policy adjustments would stimulate a rise in financing costs, implying future increases in corporate debt interest rates and possibly leading to a deterioration in companies' cash flows.
Since the 1980s and 1990s, influenced by the burst of the real estate and asset price bubble, Japan's economy has been in a state referred to as "the lost three decades." Over these decades, due to a lack of economic vitality, stagnant wage growth, and persistently low inflation, the Bank of Japan's official interest rates have remained at extremely low levels.
Last month, despite the Bank of Japan's continued adherence to its Yield Curve Control (YCC) policy, it widened the fluctuation range for 10-year government bond yields, adapting to the evolving inflation situation and economic growth prospects. This move is seen by financial institutions and Japanese businesses as a harbinger of the central bank's impending shift from its decades-long low interest rate policy.
A monthly survey of 503 Japanese large and medium-sized non-financial companies by Reuters showed that 7% of the businesses expect to be impacted by the end of this fiscal year in March, while 34% believe their financing will be affected in the next fiscal year. A manager from a service industry company mentioned that while the impact of financing costs is limited for leading companies, it creates significant pressure on small and medium-sized enterprises (SMEs).
The survey also revealed that despite concerns over China's economic slowdown, China remains an important market for Japanese businesses. About 82% of the respondents expect China's importance to their future business to remain as it is. A manager from a machinery manufacturing company noted that although the downturn in China's economy has not yet resulted in a decrease in orders for production equipment, the impact on the automotive supply chain is particularly severe, highlighting the challenges Japanese automakers face in China.
As demand declines and potential financing costs rise, Japanese businesses face more severe price competition in the Chinese market. Some Japanese firms stated that they cannot compete on price with Chinese companies in dual-use products. To maintain competitiveness in the Chinese market, about half of the respondents said they would strengthen price negotiations with local suppliers.
