Dented by falling stock prices and fears that the war in Iraq will hurt any nascent economic recovery, business sentiment remained weak in March, according to a key Bank of Japan survey released Tuesday.
Sentiment among large manufacturers -- the only strong engine driving the economy -- slipped slightly from December, causing the diffusion index to slide 1 point to minus 10, the quarterly "tankan" survey shows.
Although better than expected, the fall ended three straight quarters of improvement and was the first decline in five quarters.
The diffusion index is the percentage of firms that believe economic conditions are favorable minus those that believe the opposite is true. A negative number means those businesses that say conditions are poor outnumber those that believe they are good.
Sentiment among large nonmanufacturers -- the sector most closely linked to domestic demand -- improved slightly to minus 14 from minus 16.
"The economy is leveling off," said Mamoru Yamazaki, Barclays Capital's chief economist in Japan. "If the U.S.-Iraq conflict ends within a few months, the economy may be able to grope toward positive growth.
"In any case, it will be an extremely short-lived and slight recovery, as structural problems and great uncertainties remain."
A detailed study of businesses across the nation and their medium-term plans, the tankan is one of the BOJ's key sources of information for planning future policy moves.
"The tankan results show that even when companies expected the Iraq war to end quickly, they remain extremely cautious," said Kazutaka Kirishima, senior economist at Sumitomo Life Research Institute.
About 90 percent of the responses were provided prior to the U.S.-led attack on Iraq, when uncertainty about when the conflict would begin plunged Tokyo stock prices to 20-year lows, the BOJ said. The BOJ sent survey questionnaires to 8,428 companies, of which 97.5 percent responded between Feb. 24 and March 31.
Large manufacturers forecast that business would improve slightly in the next three months, nudging the DI up 2 points to minus 8.
But Kirishima argued that the economy has still to factor in the full potential impact of the war.
"Most companies expected the war to end in two months at most," he said. "Any detraction from that will mean earnings downgrades and an even lower ceiling to an already weak recovery."
Large automakers -- one of the few stars of the economy -- said they expected business to worsen, bringing the DI down 12 points to 16. More carmakers projected business would worsen further in the next three months, bringing the projection DI down to 4.
Companies' current profit forecasts for fiscal 2002 look strong, however, with all firms projecting an 11.3 percent increase from last year. Large manufacturers project a 32 percent rise, large nonmanufacturers a 4.5 percent increase, small manufacturers see a 37.8 percent rise and small nonmanufacturers project profits will climb 6 percent.
Fiscal 2003 forecasts similarly showed a 13.5 percent increase among all industries. Although these projections are likely to be reduced in the coming months, as they are every year, the numbers reflect that the outlook is by no means bleak.
Planned capital expenditures were better than expectations, as aggressive cost cuts were leaving companies with more cash to spend on new plant and equipment investment.
Large manufacturers forecast a 2.9 percent year-on-year increase in fixed investment in fiscal 2003. Small nonmanufacturers, however, said they were cutting back 15.4 percent year-on-year.
Admitting that lending conditions are about the same as three months ago, companies continue to expect banks to tighten lending in the coming months as they struggle with problem loans, the tankan shows. That tendency was especially pronounced among small firms.
"Uncertainty about the banking system has become so chronic it has become an idiosyncrasy in this survey," Yamazaki said.
New BOJ Gov. Toshihiko Fukui has vowed that he will try to make sure the effects of the BOJ's monetary easing policy filter through to companies, so the tankan may raise political pressure on the BOJ to take further action.
Japan has been mired in a decade-long slowdown, with banks burdened with massive bad debts and unemployment at near-record highs.
With your current subscription plan you can comment on stories. However, before writing your first comment, please create a display name in the Profile section of your subscriber account page.