The outlook of the nation’s corporations — particularly large manufacturers — continued to improve over the past three months, according to the latest quarterly “tankan” business sentiment survey, released Tuesday by the Bank of Japan.
Overall, the diffusion index — the percentage of companies that believe business is favorable minus those that feel the opposite — rose for the seventh consecutive quarter among firms in all four categories: large and small manufacturers and large and small nonmanufacturers.
Corporate optimism was most conspicuous at large manufacturers of electrical machinery, reflecting strong domestic demand for information technology-related products. Their index soared to a reading of 41, up 14 points from the June survey.
IT demand helped counter the poor showing among companies in the petroleum industry, who were hit hard by the recent surge in crude oil prices and charted a 7-point drop to minus 57.
The diffusion index for large manufacturers as a whole rose to 10, up 7 points from the previous survey’s reading of 3. According to the survey, large manufacturers plan to increase capital investment by 13.8 percent in fiscal 2000, which runs through March 31.
Large manufacturers were conservative, however, in their outlook for December, nudging the DI by only 1 point to 11. Analysts said this was caused mainly by external factors, mainly concerns regarding an economic slowdown in the United States.
The DI for small manufacturers rose 4 points to minus 17. In the nonmanufacturing sector, which includes real estate, construction and retail, the DI rose 3 points for large companies to minus 9, and 3 points for small companies to minus 24.
“But they are all still underwater,” said Akio Makabe, chief economist at Dai-Ichi Kangyo Research Institute’s Economic Research Division. “You might call this a top-to-bottom recovery, and recovery is still extremely slow among small nonmanufacturers.”
Pointing to the 24.8 percent increase in profits that large-scale manufacturing firms project for fiscal 2000, he said, “Large-scale Japanese companies are increasing profitability by pushing costs down. They are doing this by cutting jobs, passing the parcel to households, and affecting household consumption.”
Indeed, small nonmanufacturers polled said they planned to reduce spending on plants and equipment — a key gauge used to determine sustainable private sector-led growth — by 1 percent to a revised minus 10.3 percent for the current fiscal year.
And while the BOJ report also indicates that large manufacturers predict that sales will rise 5.1 percent in fiscal 2000 for the fourth consecutive jump, small nonmanufacturers project a 0.9 percent fall in sales.
Large nonmanufacturers forecast a 2.3 percent rise in sales, while small ones see a 3.1 percent rise.
In general, the tankan results did not surprise analysts, who were divided on whether to see it as affirmation of continued growth, or, like Masatoshi Sato, manager of Mizuho Investors Securities Co.’s Equity Information Group, as foreboding a slowdown in the economic recovery.
“If you look at it optimistically, you can take the tankan as a sign of gradual improvement in the economy, and that the BOJ’s scrapping of the ‘zero-interest-rate’ policy (in August) had no effect,” Sato said.
“But there are signs of latent insecurity among small and medium-size nonmanufacturers, which support the nation’s domestic demand, that could weigh heavily in the future,” he added.
James Malcolm, an economist at JP Morgan (Securities Asia), pointed instead to small nonmanufacturers’ improved outlook — the DI increased 3 points from the previous survey to minus 24 — for December, pointing out that the gap between large manufacturers and small nonmanufacturers was narrowing.
The only surprise was that external negative forces, such as the recent surge in crude oil prices and the fall in the value of the euro, had little impact on the September tankan, he said. Further external negative forces were one of the major concerns for economic recovery, he said.
“There is a little bit of softening in high-tech spending in the U.S.,” he said. Pointing out that there was strong domestic demand in both Asia and Japan, he added, “We are going to have to wait for the December tankan to check the impact of a slowdown overseas.”
As with previous surveys, BOJ officials declined to comment on whether the latest tankan has changed the central bank’s assessment of the economic situation, leaving it up to market participants to interpret Tuesday’s data.
The BOJ will give its judgment on the economy, incorporating the tankan results, in its next monthly report, officials said.
For the latest survey, the BOJ sent questionnaires to 9,069 firms, of which 94.9 percent replied. The survey was carried out between Aug. 31 and Monday.
Speaking at a regular news conference Tuesday, Finance Minister Kiichi Miyazawa expressed satisfaction, saying the latest BOJ survey shows the economy is recovering steadily.
“Overall, I’m modestly satisfied with the result of the tankan,” Miyazawa said. “Business sentiment toward December is relatively optimistic as well.”
Nonetheless, the finance minister noted that a delay in recovery among small and midsize nonmanufacturers has caught his attention.
“I wonder if the delay has something to do with consumer spending,” Miyazawa said. “Or that sector may be under structural changes to some extent.”
Same size for budget
The government does not intend to reduce the size of an imminent supplementary budget because of the improved results in the Bank of Japan’s “tankan” business confidence survey, Chief Cabinet Secretary Hidenao Nakagawa said Tuesday.
Tokyo plans to prepare an extra budget of nearly 4 trillion yen for this fiscal year.
It will be used to finance an economic stimulus package worth more than 10 trillion yen.
“The next supplementary budget is aimed at establishing the foundation for new economic development in the 21st century,” Nakagawa told a regular news conference. “Therefore we are not considering downsizing it when compiling the budget.”
He said that while the tankan results reflect a recovery trend in the corporate sector, employment conditions are still severe and consumer spending leveling off.
The government will take all possible measures to make sure the nation’s economy recovers, with private demand smoothly replacing public demand, he said.
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