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Business confidence among large companies improved in the July-September quarter for the first time in three quarters on the back of rising corporate profits and economic growth, the government said Friday.

The index of business conditions at companies capitalized at 1 billion yen or more came to 10.5 for all industries, a jump from 1.8 in the April-June quarter, according to the survey conducted jointly by the Cabinet Office and the Finance Ministry.

The index is compiled by subtracting the percentage of companies reporting deteriorating business conditions from that of firms reporting improvement.

A Finance Ministry official said the result suggests companies remain in good shape despite a substantial fall in the April-June reading to 1.8 from 6.1 last quarter.

“We had thought the dive in the index in the April-June period would be temporary and the latest poll proved that the view was right,” the official said.

The index for big manufacturers stood at 12.7 in the July-September quarter, up from 1.4 the previous quarter, and the index for big nonmanufacturers rose to 9.2 from 2.0.

For midsize companies capitalized at 100 million yen or more but less than 1 billion yen, the all-industry business confidence index gained to 3.2 from minus 1.5 in the previous quarter.

The index for small companies — capitalized at 10 million yen or more but less than 100 million yen — improved to minus 12.4 from minus 17.9.

Looking ahead, the business confidence index for large companies is projected to be 10.7 for the October-December quarter and 7.9 for the January-March quarter.

The poll also indicates companies remain bullish about boosting their capital investment in the current fiscal year, although the pace of growth is likely to slow in the second half of the period.

Companies of all sizes forecast a 9.1 percent growth in capital spending in fiscal 2006 from the previous business year, with a 14.1 percent rise in the April-September half of the year and a 5.1 percent increase in the second half.

Manufacturers plan to increase capital spending by 19.3 percent and nonmanufacturers by 3.3 percent in the current fiscal year.

Tatsushi Shikano, a senior economist at Mitsubishi UFJ Research & Consulting Co., said companies’ positive stance on increasing capital investment suggests a similar bullish view might be found in the Bank of Japan’s next “tankan” quarterly business sentiment survey, due out Oct. 2.

Firms have already shown strong projections for capital investment in recent tankan polls, Shikano said.

“If such a trend continues in the October tankan, it will be seen as an upward deviation from the central bank’s scenario for a sustained economic growth,” he said.

Excessive capital investment could result in volatile movement in the economy and thus give an excuse for the BOJ to raise its benchmark short-term interest rate to rein it in, analysts said.

The survey also shows the index for employment conditions at big companies in all industries logged 14.0 as of Sept. 30, compared with 12.7 as of June 30, underscoring the tightening labor market.

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