Business sentiment up but outlook gloomy, ‘tankan’ says

Kyodo News

Business sentiment improved at Japan’s biggest manufacturers last quarter thanks to solid exports, but uncertainty is prevailing amid waning government incentives and lingering concerns over the rising yen, the Bank of Japan’s “tankan” survey said Wednesday.

The tankan index unexpectedly surged 7 points to hit 8 in the July-September quarter, but the key sentiment gauge is projected to plunge to minus 1 in December, a figure some analysts say may put pressure on the BOJ to ease monetary policy further next week.

The survey, which has notched sixth consecutive quarters of gains, also showed that sentiment among nonmanufacturing enterprises kept pace as well, gaining 7 points to hit 2. But nonmanufacturers also see sentiment worsening in the next three months, with the index projected to end up standing at minus 2.

“The outlook of major makers’ sentiment is worse than expected. While the fading effect of a subsidy program for purchases of ecologically friendly cars is one factor, the slowdown in the global economy and the yen’s rise are also affecting the sentiment,” Yusuke Ichikawa, an economist at the Mizuho Research Institute, said.

It is the first time since December 2008 that major manufacturers have projected a downturn in sentiment for the next three months.

The prospects for export industries are especially dismal, with sentiment at automakers jumping to 32 on last-minute buying to beat the end of government subsidies in early September but tumbling to minus 6 in the outlook for December, which would be the sharpest fall ever.

The yen’s appreciation this summer against the dollar also dampened sentiment because it erodes the value of earnings when repatriated. In the survey, big manufacturers said they anticipate the dollar averaging ¥89.66 in fiscal 2010, compared with current levels around ¥84.

The highly watched tankan index represents the percentage of companies reporting favorable business conditions minus those describing unfavorable conditions.

The September indexes for major manufacturers and nonmanufacturers compare with the average market forecasts of plus 6 and minus 2, respectively, taken in a Kyodo News survey.

According to the latest tankan, big companies in both the manufacturing and nonmanufacturing sectors now plan to increase capital investment by 2.4 percent in fiscal 2010 compared with the previous year, a downward revision from the June survey.

As for earnings prospects, large manufacturers expect pretax profits in fiscal 2010 to grow 54.3 percent from the previous year. Major nonmanufacturers, meanwhile, are expecting an increase of 13.3 percent.

The tankan is one of the key factors that could affect the BOJ’s decision on whether to take additional monetary easing steps, according to sources close to the matter.

The central bank is expected to discuss the matter at its two-day policy meeting, which starts Monday.

Ichikawa said the survey, which showed that the outlook for business is “increasingly worsening,” will likely put more pressure on the BOJ to loosen monetary policy.

The BOJ surveyed 11,283 companies between Aug. 23 and Sept. 28 and got responses from 98.9 percent.