Tankan adds to view of Japan recovery as business sentiment improves

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TOKYO, Oct. 1 Kyodo -
Business confidence among Japanese industries has improved amid signs of
recovery in economic activities, the Bank of Japan said Thursday, with its
closely-watched Tankan quarterly survey showing the index of sentiment among
big manufacturers rising 15 points to minus 33.
Rising exports and industrial production apparently supported the brisk
outcome. The confidence of major nonmanufacturers also improved in the three
months through September, with the index rising 5 points from the previous
quarter to minus 24, the central bank said.
The results, both marking the second consecutive quarter of improvement for the
first time in nearly three years, are expected to fuel optimism over the
outlook for the Japanese economy, which has been struggling to exit from its
worst recession since World War II.
But analysts emphasize that downside risks remain due to weak domestic demand,
the high unemployment rate and the recent strength of the yen in the currency
market that works against Japanese exports. The latest Tankan does not cover
the appreciation of the Japanese currency against the U.S. dollar over the last
several days.
The results compared with the average market forecasts in a Kyodo News survey
of a 15-point rise for manufacturers and a 3-point gain for nonmanufacturers.
The sentiment of smaller companies turned upward after continuous deterioration
in recent quarters.
The confidence index for small manufacturers rose 5 points to minus 52 for the
first improvement in seven quarters, while that of small nonmanufacturers grew
5 points to minus 39, the first rise in 11 quarters.
On prospects, the sentiment of large manufacturers is expected to record a
further 12-point rise in the October-December period to minus 21. Big
nonmanufacturers are projected to gain an additional 7 points to minus 17.
The outlook for smaller businesses is also bright, with manufacturers expected
to rise 8 points to minus 44. But nonmanufacturers are projected to fall 1
point to minus 40.
The diffusion indexes represent the percentages of companies reporting
favorable business conditions minus those of firms describing an unfavorable
environment.
''We saw a recovery at an expected pace,'' said Hideo Kumano, chief economist
at the Dai-ichi Life Research Institute.
Corporate sentiment had dropped to its worst level following the bankruptcy
last year of U.S. investment bank Lehman Brothers Holdings Inc., Kumano said,
adding that the confidence that was the lost ''has been almost
half-recovered.''
He also said the new government under Prime Minister Yukio Hatoyama needs to
maintain efforts by the previous administration to boost domestic demand,
including the subsidy program for the purchase of energy-efficient appliances
and tax breaks for environment-friendly vehicles.
Chief Cabinet Secretary Hirofumi Hirano hailed the Tankan results, but the
government's top spokesman told a press conference there is a need to ''closely
watch'' the economic environment, especially over the country's jobless rate,
which reached an all-time high of 5.7 percent in July.
The Tankan showed that both large and small companies have almost completed
output and employment reductions triggered in the wake of the economic
slowdown, with the number of firms responding in the survey that they have
excessive employees declining.
Takahide Kiuchi, senior economist at Nomura Securities Co., said the tendency
for companies to refrain from making fresh investments and hiring new employees
remains.
''This has consequently reined in individual consumption and corporate capital
spending, which are the main pillars of (Japan's) domestic demand,'' Kiuchi
wrote in his report.
On large firms, Tankan showed both manufacturers and nonmanufacturers plan to
cut investment by an average 10.8 percent in the current fiscal year through
March from the previous year. The number compared with a planned 9.4 percent
reduction in the bank's survey in June.
Large and small manufacturers plan to cut their capital spending by 25.6
percent and 39.7 percent, respectively, both the biggest reduction among
comparable data, which became available in fiscal 1973.
As government data have shown some recovery in Japanese exports and industrial
production, the latest Tankan added to the evidence that large firms, both
manufacturers and nonmanufacturers, have seen upturns in demand, progress in
inventory cuts and rises in wholesale prices.
On earnings, however, they remain pessimistic. Both big makers and nonmakers
estimate their sales and pretax profits will shrink in fiscal 2009 from the
levels in fiscal 2008 for the second consecutive year.
Large manufacturers, including Toyota Motor Corp. and Sony Corp., expect an
average 14.3 percent slide in sales and 38.9 percent fall in pretax profit.
The BOJ surveyed 10,235 companies between Aug. 26 and Sept. 30, receiving
responses from 99.0 percent of the firms.
==Kyodo