The big surprise from Friday’s downbeat survey on Japanese business sentiment is that it nudged share prices lower. Sure, the Bank of Japan’s widely followed Tankan survey showed big manufacturers’ sentiment at a two-year low – but how could it have been otherwise?

Data from the world’s second biggest economy have turned relentlessly bleak. Last week estimates of growth for the third quarter were revised down to an annualised 1.5 per cent compared with initial estimates of 2.6 per cent. A few days later a government survey revealed that consumer confidence had reached a four-year low in the month of November.

The recently completed reporting season showed a deceleration in earnings growth and the stock market, down 10 per cent this year in local currency terms, has lagged behind global peers. Add in a likely US slowdown and a bout of yen appreciation, and it is hard to see what Japanese manufacturers have to smile about.

The pressing question is how bad things can get. There are some one-off factors depressing growth, including more stringent new building regulations, but the basic mood is one of caution. Companies themselves are looking for a modest 1.1 per cent rise in recurring profits this year, according to the Tankan.

Higher prices for oil and other raw materials suggest margins will continue to contract, particularly since companies struggle to pass on increases in input costs. Alone of the big industrialised countries, the price of Japan’s exports to the US fell in the year to November, according to US data.

Are there any bright spots? Optimists can take heart from the plans for bigger spending. Large companies plan to raise capital expenditure this fiscal year, although this tends to be an unreliable part of the survey and spending plans will be swiftly whittled back if demand cools. Oh, and money should remain cheap. The chances of the BoJ being able to raise rates this fiscal year look slim.

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