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Businesses have become less pessimistic about their outlook over the past three months, according to the Bank of Japan’s “tankan” business confidence survey. The central bank’s quarterly survey for December, released Monday, shows business sentiment has improved among firms in all four main categories — manufacturers and nonmanufacturers, large and small — for four straight quarters. The diffusion index — the percentage of firms that feel business is favorable minus those that feel the opposite — remained in the negative range in all four major categories. Still, the December survey shows companies are growing confident. It was the first time since the late 1980s that firms in the four categories reported an improved sentiment for four straight quarters, BOJ officials said. The index for large manufacturers was minus 17, up 5 points from the previous survey released in September. Small manufacturers were also more optimistic than in September, with that index improving by 8 points to minus 32. The index for large nonmanufacturers was minus 19, up 4 points, while one for small nonmanufacturers was minus 28, up 3 points. The results were within many economists’ expectations. They said the figures underscore the government’s theory that the economy is on a slow — but not yet self-sustained — recovery. The rise in the index came despite a recent advance of the yen against the dollar, which pushed down profits of export-oriented firms. During the survey period between Nov. 11 and Dec. 10, the dollar fell from around 105 yen to the 102 yen range. The average exchange rate expected by large manufacturers for the entire fiscal 1999 meanwhile was 112.37 yen to the dollar. James Malcolm, an economist with JP Morgan, said the latest tankan showed the strong yen has had little impact on the business sentiment. But the yen appreciation will continue to be the biggest risk factor for corporations, he said, noting the degree of risk will depend not so much on how much but on how fast the yen appreciates and on how volatile the exchange rate movements are. If the dollar moves to the 95 yen level within the next two or three months, it will put big pressure on corporate profits, he said. On the other hand, if the rate remains in the 100-105 yen range, the impact on corporate profits will be subtle, he added. As usual, BOJ officials declined comment on how the latest figures of the tankan will affect the central bank’s assessment of the economy, saying they have received the data but haven’t analyzed the numbers. The survey also shows many companies expect their pretax profits to surge for the current business term, which runs through March 31, even though their sales level remains stagnant. Economists say this is a sign that corporate restructuring, through such measures as personnel cuts, is well in progress. Large manufacturers predict sales to rise by 0.2 percent from fiscal 1998 and pretax profits to jump by 19.2 percent. Large nonmanufacturers expect sales to drop by 3.8 percent, but are forecasting profits to climb by 6.1 percent. In smaller enterprises, manufacturers predict a 1.8 percent fall in sales and a 58.2 percent increase in their pretax profits. Nonmanufacturers are expecting a 1.7 percent fall in sales and a 13.1 percent rise in profits. The results also show large manufacturers plan to cut their fixed investment by 10.9 percent for fiscal 1999, while large nonmanufacturers expect a 10.8 percent cut in capital investment. Small manufacturers plan to cut capital spending by 25.4 percent for the current fiscal year, while small nonmanufacturers forecast a 13.3 percent fall. But small firms revised their capital spending projections upward by an average of 8 percent after the last survey. Monday’s tankan also indicates that, although many firms still feel they have a bloated workforce, the percentage of such firms has fallen slightly. The index for employment — the percentage of companies that feel they are hiring more people than they need minus those that feel they have a labor shortage — was 29, down 1 point, for large firms, and 14, down 4 points, for small firms. Masaaki Suzuki, an economist at Fuji Research Institute, noted that capital investment remains weak, despite small firms revising their capital investment plans upward. He predicted that capital investment, touted as the key factor in getting the economy back on a self-sustained recovery, will not go back up until the second half of the year. As for future concerns, Suzuki said he fears business sentiment at small firms may stop improving. Restructuring, combined with a stagnant domestic demand and wearing-off of public works spending, might jeopardize business confidence for small firms, he added.

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