Business sentiment among the nation’s corporations improved over the past three months, underscoring a recent recovery trend, according to the Bank of Japan’s “tankan” business sentiment survey for June.
The June results of the central bank’s quarterly survey, released Tuesday, are expected to be a strong factor in the BOJ’s decision on whether to end its 17-month-old “zero-interest-rate” policy.
Tuesday’s results show the diffusion index — the percentage of firms that feel business is favorable minus those that feel the opposite — rose for firms in all four categories: large and small manufacturers and nonmanufacturers.
The recovery trend was most conspicuous among large manufacturers, whose index bounced back into positive territory with a reading of 3, up 12 points from the previous survey in March. It was the first time since September 1997 that the index in that category was positive.
The diffusion index for large nonmanufacturers was minus 12, up 4 points, while the DI for small manufacturers was minus 21, up 5 points.
Private-sector economists said the improved sentiment, coupled with upward revisions in the surveyed firms’ estimates for capital spending in fiscal 2000, gives the BOJ good reason to end its “zero-interest-rate” policy as early as July 17, when the next policy board meeting is scheduled.
“I believe the probability that the BOJ will abandon the policy (on July 17) has now gone up to between 70 percent to 80 percent,” said Yasunari Ueno, chief market economist at Fuji Securities Co.
However, it remains unclear if the BOJ can overcome political pressure against raising interest rates. Both Finance Minister Kiichi Miyazawa and Economic Planning Agency chief Taichi Sakaiya issued warnings against the possible rate hike after June’s results were released.
The BOJ survey “does not directly reflect anything regarding deflationary risks or falling income and consumption,” Miyazawa told a regular news conference.
The Finance Ministry’s management of the economy will remain unchanged until gross domestic product data, including figures for personal consumption, for the April-June quarter are released in September, he added.
While acknowledging that monetary policy is under the BOJ’s jurisdiction, “I nevertheless believe the important things (to monitor) in the economy are consumption trends,” Miyazawa said.
Sakaiya said at a separate news conference that he thinks the BOJ should not decide to lift its “zero-interest-rate” policy based on the tankan alone.
As with previous surveys, BOJ officials refused to comment on whether the latest tankan has changed the central bank’s assessment of the economic situation, saying it is up to market participants to interpret Tuesday’s data.
The BOJ will give its judgment on the economy, incorporating the tankan results, in its monthly report July 19, the officials said.
Regarding spending on plants and equipment — considered a key gauge to determine whether the economy is on a private demand-led recovery — firms in all categories revised upward their fiscal 2000 spending plans from the previous survey.
Large manufacturers plan to increase their capital spending by 11.3 percent in the current fiscal year, which runs through March 31. Large nonmanufacturers plan a minor increase of 0.7 percent.
Small companies meanwhile said they expect to cut capital spending for fiscal 2000, with manufacturers planning a 1.7 percent cut and nonmanufacturers a 9.4 percent reduction.
BOJ officials as well as private-sector economists said the low projections for capital spending by small firms are largely due to drastic increases in those firms’ spending toward the end of fiscal 1999.
The tankan also indicates that firms are projecting beefed-up sales in fiscal 2000. Large manufacturers expect sales to increase 3.8 percent, the second jump in a row. Large nonmanufacturers forecast a 1.7 percent increase, small manufacturers see a 2.4 percent hike and small nonmanufacturers predict a 0.5 percent rise.
In another upbeat sign, firms in all four categories are expecting their pretax profits to surge in the current fiscal year.
Large manufacturers project pretax profits to jump 21.1 percent from the year before, while small manufacturers project profit levels to surge 25.8 percent. The degree of increase is smaller for nonmanufacturers, with large firms forecasting a rise of 2.6 percent and small firms a 4.6 percent increase.
Ueno suggested that, while the BOJ’s monetary policy tightening looks imminent, such action would be premature since an upturn in employment and income levels has not been confirmed yet.
He said that for the central bank to truly determine whether income levels have bottomed out, it will have to wait for the next spring wage negotiations between employers and labor unions.
For the latest survey, the BOJ sent questionnaires to 9,130 firms, of which 95.2 percent replied. The survey was carried out between June 1 and Monday.