Japan business confidence falls amid strong yen

[December 15, 2010]  TOKYO (AP) -- Business sentiment in Japan has fallen for the first time in seven quarters as worries about a persistently strong yen and slowing exports hit corporate confidence.

The Bank of Japan's quarterly "tankan" survey of business sentiment released Wednesday showed that the main index for large manufacturers fell to 5 in December from 8 three months ago.

The figure represents the percentage of companies saying business conditions are good minus those saying conditions are unfavorable, with 100 representing the best mood and minus 100 the worst.

The result from the latest tankan -- a closely watched barometer of the country's economic health that helps the central bank guide monetary policy -- is slightly better than Kyodo news agency's average market forecast for a reading of 3.

The index had climbed for six straight quarters as Japan mounted a solid recovery from deep recession. But a strong yen and easing global demand are battering exporters, which have been the main drivers of Japan's growth. Automakers like Toyota Motor Corp. are also feeling the impact from the expiration of government subsidies for fuel efficient cars.

"The improvement that began in March 2009 ... came to an end, giving way to deterioration, albeit small," said Goldman Sachs economist Chiwoong Lee in a note to clients.

Readings varied among sectors, he said. Metals and oil companies, which benefited from higher commodity prices, reported improving sentiment, but the mood at automakers tumbled.

The latest result suggests that companies are bracing for tougher times ahead. They predict confidence will keep deteriorating, with large manufacturers saying they expect the index to be in negative territory for the first time since March.

Recent economic indicators have only reinforced concerns about the world's third-biggest economy.

Japanese factories cut production for the fifth straight month in October, and consumer spending fell. Consumer prices have fallen for 20 straight months. Unemployment worsened to 5.1 percent -- historically high for Japan.

In a recent survey of 42 economists, the government-affiliated Economic Planning Association forecast Wednesday that gross domestic product would shrink 1.9 percent in the fourth quarter.

The government is facing sinking approval ratings and has made job creation a priority, last month passing a new $61 billion stimulus package with support for small businesses and regional economies. Earlier this week, Prime Minister Naoto Kan announced plans to cut the country's hefty corporate tax rate by 5 percentage points in a bid to stimulate the economy and keep Japanese companies from moving abroad where tax rates are lower.

Some economists, however, say companies are a bit more pessimistic than they need to be.

Historically, companies tend to be cautious when the economy is staging a recovery, said Masamichi Adachi, senior economist at JPMorgan Securities Japan. He doesn't think the tankan's prediction for business confidence to become negative will happen.

The December tankan showed that the mood among major non-manufacturers slipped to 1 from 2 recorded in September.

Small and medium-sized enterprises also reported weak numbers. The confidence index for medium-sized manufacturers fell to 1 from 4. The small manufacturers' index stood at minus 12 from minus 14. It's a slight improvement, but the negative figure indicates that pessimists still outnumber the optimists.

Big companies indicated they planned to increase capital investments by 2.9 percent this fiscal year through March 2011, a slight improvement on September's survey.

The Bank of Japan surveyed a total of 11,183 companies between Nov. 11 and Dec. 14. Almost 99 percent responded.

Its next policy board meeting is scheduled for Dec. 20-21.

[Associated Press; By TOMOKO A. HOSAKA]

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.