Business confidence battered by strong yen, Europe’s crisis

by Jun Hongo

Staff Writer

Business sentiment among large manufacturers deteriorated in December, according to the Bank of Japan’s quarterly “tankan” index released Thursday, underscoring the growing concern over Europe’s sovereign credit risk and the persistent rise of the yen.

The business index for major manufacturers — companies capitalized at ¥1 billion or more — fell to minus-4, down 6 points from September, when it was plus-2. The reading in June was at minus-9 following the Great East Japan Earthquake.

“The quarterly numbers are not surprising and within our expectations. The downturn of the overseas economy and the strong yen influenced the outcome,” Nobuyasu Atago, senior researcher at the Japan Center for Economic Research, told The Japan Times.

“There are some uncertainties for the manufacturers, with the yen being traded in the 70s” against the dollar, Atago also pointed out.

The tankan index figures are determined by subtracting the percentage of companies with bad business sentiment from those with a positive outlook. The quarterly survey covered 10,846 firms between Nov. 14 and Wednesday and drew responses from 98.9 percent of them.

While September’s improvement was largely due to the recovery of the supply chain following the March 11 disasters, the optimism quickly wore out this quarter with the European credit risk becoming more tangible while the yen remained at historic highs.

The yen hit a record 75.35 against the dollar in October and has stayed strong, despite government and BOJ intervention in the market to bring it down.

The surge has bitten into the profits of Japan’s exporters while the flooding in Thailand devastated production lines operated by Japanese manufacturers.

The tankan also showed that large manufacturers have a pessimistic outlook for their businesses, predicting that the next survey in March will see the index drop further and post a minus-5 reading.

The latest tankan showed a particularly sharp decline among electronics manufacturers. Their index fell 16 points from last quarter’s minus-5 to minus-21.

The index for the petroleum and coal sector meanwhile fell to minus-13 from zero in the previous quarter, indicating the economic downturn overseas is casting a shadow over a wide variety of businesses.

Sentiment among medium-size manufacturers remained unchanged at minus-3, while small manufacturers improved slightly to minus-8 from minus-11.

Index for large nonmanufacturers improved to 4 from 1.

The communications sector of the large nonmanufacturer section continued to exhibit positive sentiment, adding 4 points from the previous survey to reach 44, as smartphones continue to see strong sales.

Restaurants and lodgings also went up, rising 16 points to minus-2 from the previous quarter’s minus-18, an indication their business is on a recovery path following an extended downturn caused by the March 11 disasters.

Meanwhile JCER’s Atago noted the relatively stable reading in the employment index is a positive trend that should help avoid any quick dip in consumer spending.

The BOJ is scheduled to kick off a two-day Policy Board meeting next Tuesday to discuss whether a further easing of its monetary policy is needed in light of the tankan results.