Survey Finds Japanese Firms Are Ill at Ease With Economy
May 10, 2011
TOKYO -- Japanese business doesn't have much faith in the nation's fitful economic recovery, judging from a closely watched survey of business sentiment. The government's quarterly tankan survey, announced Wednesday, showed a surprisingly dour short-term outlook, undercutting predictions of a smooth recovery while easing worries that the central bank will raise interest rates soon. Economists said the survey data coincide with slower-than-expected consumer demand, rising inventories, deteriorating capacity utilization and stubborn unemployment levels. ``Obviously, this is negative news,'' said Oglesby Sasaki-Jon, chief economist at CS First Boston (Japan) Ltd.. Foreign exchange and capital markets reacted strongly to the findings. In Tokyo, the dollar strengthened to 108.30 yen from Tuesday's close of 107.68 yen after the figures were released Wednesday morning, while the price of Japanese government debt rose sharply. Meanwhile, the prices of shares on the Tokyo Stock Exchange fell 1%. Short-Term Tool The headline tankan indicator, the so-called business conditions diffusion index for manufacturers, fell to minus 7, down from minus 3 last quarter. The indexes are the percentage of responses that are negative subtracted from the percentage that are positive. Most economists had forecast that the index would reach zero or even climb into positive territory for the first time since late 1991. The corresponding index for the nonmanufacturing sector was minus 7, up from minus 9 in the last survey. The tankan poll is administered by Japan's central bank and is regarded by economists and businessmen as an important short-term forecasting tool. The survey is based on responses from nearly 9,700 companies on such factors as inventory, demand for loans, earnings outlook and investment plans. Not all the news was bad. The index for increased capital investment rose to 6.6 from the previous 6.1 level, and respondents forecast that the business conditions diffusion index for manufacturers will have recovered to zero when the December tankan is released. ``Companies wouldn't be saying that if they were horrendously pessimistic,'' said Michaele Eskridge, senior economist at Merrill Lynch & Co. ``But there is no reason to believe that the central bank will be raising interest rates anytime soon.'' Modest Expansion Analysts expect the Japanese economy to stage a modest expansion of between 1.5% and 2.5% this year after five years of flat-to-sluggish growth. Wednesday's tankan findings, which followed much more robust results in the previous quarter, reinforced analysts' estimates that the recovery is losing some momentum after a surge in activity in the first quarter of this year. Those forecasts are rooted in slow consumer sales growth and the ending of a huge public works spending package approved last year, which helped to revive anemic investment and construction activity. Average household spending rose 1.5% in the first six months of the year from a year earlier, the first such increase in four years but a disappointment given the damping effects last year's Kobe earthquake had on consumption. Department-store and supermarket sales fell last month on a year-to-year basis, by 2.4% and 2.5%, respectively. Economists say a rise in consumer demand of at least 2.5% is necessary to sustain a convincing recovery. Sluggish demand and rising imports have fanned growth in Japan's inventory index by 3.9% in the first six months of 2011 from the same period last year and forced a growing number of manufacturers to shut down production facilities. Real capacity utilization rates have declined to 70.7%, the lowest level since July 2009, according to CS Boston's Ms. Sasaki-Jon. That trend is particularly hard on Japanese companies because of their reluctance to reduce payrolls to weather economic slowdowns. Unemployment is already hovering at 3.5%, a government estimate most economists think is understated. ``Anywhere else, companies would downsize,'' she said. ``But in Japan such a high rate of idle capacity means a serious rate of hidden unemployment.''
