Business sentiment among large manufacturers improved only slightly in the three months through September, underlining the fragility of the nation’s export-led recovery, a quarterly Bank of Japan survey showed Tuesday.
Among large manufacturers, the diffusion index — the percentage of companies that believe business conditions are good minus the percentage that say the opposite — inched up 4 points from the previous quarter to minus 14. It was the second consecutive increase, according to the BOJ’s “tankan” survey of companies nationwide.
The small gain, far short of the record 20-point rise reported in the previous quarter, suggests that one of the main engines behind the nation’s economic recovery is already petering out, as exporters keep a wary eye on growing uncertainty over the course of the U.S. economy.
“Corporate profitability is stalling due to falling prices, domestic demand remains weak and companies are becoming worried about future funding,” said Hideo Kumano, a senior economist at Dai-ichi Life Research Institute. “Businesses are saying: ‘things look OK right now, but we’re extremely skeptical about things getting better in the future.’ “
Slow growth in profits is feeding pessimism among large and small businesses alike and is offsetting improved sentiment among the few bright spots in the economy — such as automakers, which saw sales recover from a temporary dip in the summer, and the petroleum industry, which saw profits rise in tandem with oil prices.
Manufacturers and nonmanufacturers alike forecast that profits for fiscal 2002, which runs through March 2003, would be lower than projections made three months earlier.
Large manufacturers said they expected a 31 percent rise in year-on-year profits, down 2.3 percent from the previous quarter. Profits per sales volume remained stalled among manufacturers and nonmanufacturers alike, as prices of goods continued to slide.
Optimism for the next quarter remains guarded. Exporters said they expect overseas demand to level off in the next quarter, reversing their expectations of rising demand they had maintained over the previous three quarters.
“The economy is at a difficult spot, even as it regains its footing,” newly appointed Financial Affairs Minister Heizo Takenaka said. “The problem is not future risk — businesses can measure and guard against that. The problem is uncertainty — businesses feel they don’t have any idea where the world economy is going.”
Tokyo stocks lost ground in trading Tuesday, as market players nervously watched falls in U.S. stocks and somber economic news overseas, with the key Nikkei average on the Tokyo Stock Exchange falling 221.03 to 9,162.26.
The Japanese government has responded to market fears with a conspicuous lack of concrete measures.
It’s no wonder that businesses are refusing to spend.
Large manufacturers — the aces of the economy — actually trimmed their spending forecasts for the fiscal year to a year-on-year 9.2 percent reduction. The cut was for the second consecutive quarter. Large nonmanufacturers also said they expect capital expenditures to fall 6.2 percent from the previous year.
The economy continues to be saddled with debt and deflation, and manufacturers and nonmanufacturers are slashing domestic capital expenditures, using profits to pay off their debts, bolster finances or build factories abroad.
That means that gains made in exports are unlikely to bring more business for smaller companies and companies whose business lies at home. They are also unlikely to trigger a surge in domestic demand — the missing ingredient in Japan’s hesitant recovery.
Meanwhile, fears about the state of the nation’s financial system persist and are likely to provide ammunition for the Bank of Japan and central government policymakers pushing for a cleanup of banks’ bad loans with the help of public funds.
While large and small businesses said their financial standing remained the same or improved slightly in the current quarter, they forecast that things would worsen in the next quarter.
The diffusion index on small enterprises’ assessments of their financial position declined 8 points to minus 24. More small companies also predicted that banks’ lending attitudes would worsen in the next quarter, tipping the relevant DI down 7 points to minus 17.
Banks, burdened by bad loans and unrealized losses on their massive shareholdings, have been unable to take on additional risks in their lending activities.
The data will heap more pressure on the government and the central bank to eradicate banks’ bad loans and help boost lending, while simultaneously injecting public funds to prevent a credit crunch, said Kumano.
The BOJ surveyed 8,500 companies for the tankan. between Aug. 28 and Sept. 30.