By Daniel Leussink

TOKYO (Reuters) – Confidence at Japanese manufacturers in July was subdued, a Reuters poll showed, reflecting pressure from a problematic chip shortage, China’s heavy pandemic response and a weak yen that is making imported materials increasingly expensive.

The Reuters Tankan – which closely tracks the Bank of Japan’s quarterly tankan survey – showed both manufacturers’ and service-sector morale only improving modestly over the next three months.

The subdued sentiment adds to a recent mixed batch of data that underlines the economy’s difficulty to stage a robust recovery, and shows that companies struggled to benefit from improving demand, particularly at home.

The poll of 495 big and midsize firms between June 29 and July 8, of which 248 responded, showed business managers were worried about the fallout from China’s COVID-19 curbs and a persistent chips and parts shortage.

“Our sales are declining due to the impact of China’s lockdowns and the semiconductor shortage,” said a manager at a transportation equipment producer.

Japan’s factories cut output at the fastest rate in two years in May, largely due to adverse effects from China’s coronavirus restrictions, such as in Shanghai.

Some analysts believe it may take time before Japanese manufacturing and especially the key car sector will benefit from a recovery of economic activity in Shanghai, as the risk of new COVID-19 curbs remains.

The Reuters Tankan sentiment index for manufacturers held steady at 9 in July.

The index is seen inching up to 13 in October, though that is likely largely to depend on whether conditions in the autos/transport equipment sub-sector will improve. Its sentiment remained deeply negative in July.

The service-sector index inched up to 14 from 13 in June, driven by wholesalers and information/communications. It was expected to rise to 18 in October.

Retailers’ mood remained flat, while that of real estate/construction was negative, weighing on overall service sector sentiment.

The BOJ is scheduled to hold its next policy-setting meeting on July 20-21.

The central bank’s own tankan survey showed this month that the mood among Japan’s big manufacturers’ soured for a second straight quarter in the three months to June, also in part due to the hit from rising input costs.

Rising prices of energy and raw materials were frequently mentioned by business managers in the Reuters Tankan survey.

“Our margins declined due to the cost of raw materials and the weak yen,” a manager at a steel maker wrote.

(Reporting by Daniel Leussink; Editing by Kirsten Donovan)

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