Firms slightly less pessimistic: ‘tankan’

Business confidence has increased during the last three months, another sign that the economy is improving, according to the Bank of Japan’s “tankan” business confidence survey.

The central bank’s quarterly survey for March, released Monday, shows firms in three of the four main categories — large manufacturers, small manufacturers and large nonmanufacturers — were becoming more optimistic, reporting improvements in their business confidence level for the fifth straight quarter.

Small nonmanufacturers’ business sentiment remained unchanged from the previous survey, conducted in December.

Still, the diffusion index — the percentage of firms that believe business is favorable minus those that are pessimistic — is in the negative range in all of the four major categories, ruling out the possibility of the BOJ abandoning its 14-month-old zero interest rate policy in the near future.

“I think this is exactly as expected,” said Jesper Koll, chief economist at Merrill Lynch Japan. “What this survey concerns is that the recovery momentum continues to build, and at the margin, the economic recovery is broadening a little bit.”

The diffusion index for large manufacturers was minus 9, up 8 points from the previous survey, released in December. Minus 9 was the best since December 1997, when the index for large manufacturers stood at minus 4.

Small manufacturers were also more optimistic than in December, with the diffusion index improving by 6 points to minus 26.

The index for large nonmanufacturers was minus 16, up 3 points, while the figures for small nonmanufacturers were unchanged at minus 28.

As usual, BOJ officials declined to comment on how the latest figures will affect the central bank’s assessment of the economy, saying they have just received the data and have yet to analyze them.

The tankan indicates that capital investments — one of the key factors in determining whether the economy is back in a self-sustained recovery — will increase this fiscal year, which started Saturday.

While large manufacturers were the only group that projected an increase in capital investment — 4.9 percent from fiscal 1999 — private-sector economists said capital investment projection figures are good overall, because firms tend to make a low estimate of their capital investment plans at the beginning of a business year and gradually increase the volume as the year progresses.

Large nonmanufacturers plan to reduce their investments by 3.8 percent, small manufacturers by 9.4 percent and small nonmanufacturers by 6 percent during fiscal 2000.

“The 4.9 percent growth projection by large manufacturers is very good,” said Akio Makabe, chief economist at Dai-Ichi Kangyo Research Institute. “Most of the investments these firms are making are in the area of information technology, since they feel such investments are vital in order to survive the global competition.”

The survey also showed that many companies expect their sales, as well as pretax profits, to surge for fiscal 2000, which started April 1.

Large manufacturers are projecting that sales will jump by 2.9 percent during fiscal 2000, increasing for the first time in three years. Large nonmanufacturers are projecting sales growth of 2.8 percent, small manufacturers are forecasting 2.3 percent and small nonmanufacturers 1.2 percent.

But the path to full-scale economic recovery is likely to be rough, as corporations are squeezing out profits by cutting their bloated workforces, which pushes down income levels and therefore thwarts a recovery in private consumption — the biggest contributor to the nation’s economy.

The percentage of companies that believe they are hiring more people than they need minus those that feel they have a labor shortage was 34, down 2 points for large manufacturers, and 20, down 2 points, for large nonmanufacturers. Among small firms, the percentage of such firms was 18 for manufacturers and 8 for nonmanufacturers.

A total of 9,205 companies responded to the March survey, conducted between Feb. 25 and March 31.