Business confidence in Japan at 2-year high

[July 01, 2010]  TOKYO (AP) -- Major Japanese manufacturers -- riding high from a booming Asia -- haven't felt this good in two years.

A key central bank report released Thursday showed business confidence among Japan's biggest manufacturers improved for a fifth straight quarter, thanks to Asia's rapid rebound from the global recession, which has bolstered demand for the country's exports of consumer gadgets, cars and other goods.

The Bank of Japan's quarterly "tankan" survey of business sentiment showed the main index for large manufacturers stood at 1. Three months ago it hit minus 14.

The figure represents the percentage of companies saying business conditions are good minus those saying conditions are unfavorable. The higher the number, the better the mood.

The result beat Kyodo news agency's average market forecast of minus 3 and was the first reading in positive territory since June 2008.

The improvement in confidence suggests the recent turmoil in financial markets has not affected the real economy much, said Masamichi Adachi, senior economist at JPMorgan Securities Japan. It has "reassured our view that recovery remains intact," Adachi said in a commentary.

The tankan helps the central bank guide monetary policy and is a closely watched barometer of the country's economic health. The latest results lend support to the Bank of Japan's assessment that the world's second-biggest economy is enjoying a moderate recovery.

Last month, Gov. Masaaki Shirakawa credited the rest of the world, particularly emerging economies, for fueling exports, production and business investment in Japan.

Big companies surveyed by the tankan indicated they planned to increase capital investments by 4.4 percent this fiscal year through March 2011. The forecast is a significant reversal from last year's 17 percent decline.

Japan's most well-known brands have announced fatter capital spending plans for this fiscal year. Toshiba Corp. is looking to spend $14 billion over the next three years to amplify its strengths in semiconductors and nuclear power. Honda Motor Co. expects a 50 percent jump in capital investments in the year through March 2011 after slashing such spending by 45 percent last year.

The good news, however, was tempered by other details that reflect emerging worries about Europe's debt problems and ongoing caution about the sluggish domestic economy. Companies forecast marginal improvements in sentiment in coming quarters and employers report that they still have too many workers. Businesses of all sizes expect to slash hiring of new graduates by 24 percent this year, the tankan showed.

"Companies are pretty cautious given the European sovereign risk issues and appreciation of the yen and also the decline in equity markets," said Kyohei Morita, chief Japan economist at Barclays Capital. "It's really hard for companies to continue to improve their sentiment going forward."

Recent economic indicators point toward slower growth in the April-June quarter. Governments around the world are phasing out stimulus measures and turning their focus to controlling spending and debt.

Data last week showed while Japanese export growth is still robust, it has slowed every month since February. Other government reports revealed moderating factory output and household spending, an unexpected rise in the country's unemployment rate and more falling prices.

The mood among big non-manufacturers climbed to minus 5 from minus 14 in December, according to the tankan.

Small and medium-size enterprises also reported higher numbers, though their business conditions continued to lag because large manufacturers have been the main beneficiaries of export growth. The confidence index for medium-size manufacturers rose to minus 6 from minus 19 three months ago. The small manufacturers' index stood at minus 18 from minus 30.

A similar gap has emerged with companies' financial conditions. Unlike big firms, small companies say they still face problems with liquidity and bank lending.

Such differences signal that it's still too early for the central bank to ease its ultra-easy monetary policy. Its key interest rate has remained at 0.1 percent since December 2008. Last month, the Bank of Japan outlined a new lending program for commercial banks in an effort to fight deflation and fuel economic growth.

"There is still a large divergence between large and small and medium-size companies," said Masayuki Kichikawa, chief economist at Bank of America Merrill Lynch in Tokyo. "In order to help ... the BOJ would need to keep the monetary situation loose."

Central bankers also need to do more to prevent the yen from rising further, Kichikawa said.

Companies in the tankan are assuming the dollar will average 90.18 yen this fiscal year, but the Japanese currency has recently climbed to 88-yen levels. A stronger yen hurts exporters by shrinking the value of overseas profits.

The Bank of Japan surveyed a total of 11,411 companies between May 26 and June 30. More than 98 percent responded.

[Associated Press; By TOMOKO A. HOSAKA]

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