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The results of a Bank of Japan survey released Monday show that business confidence among companies is rapidly worsening as Japanese companies feel the impact of the global economic slowdown. It seems that the Japanese economy is heading into a serious slump, which may last for a long time.

The diffusion index (the percentage of companies reporting favorable business conditions minus that of companies reporting the opposite) for large manufacturers during the last three months came to minus 24, down 21 points from minus 3 for the previous three months. This represents the second sharpest decline since August 1974 during the oil crisis. The index for carmakers fell 46 points to minus 41, the lowest since June 2002.

For the next three months, the index for large manufacturers is expected to drop an additional 12 points to minus 36 and that for large nonmanufacturers is expected to decline five points to minus 14. Large manufacturers also predict that their pretax profit during the current business year will fall 24.2 percent, the first drop in seven years.

Small manufacturers’ confidence also became weak, with their diffusion index declining 12 points to minus 29, the lowest since March 2003. The index for small nonmanufacturers fell five points to minus 29, the weakest since September 2003.

Ominous is the fact that the index for measuring the degree in which large manufacturers believe that they have too many workers increased 10 points to (positive) eight, returning to positive territory for the first time in thee years. More workers, especially temporary workers, may lose their jobs. An increase in unemployment could lead to a further downturn of the economy.

Although the government last week announced a ¥23 trillion package mainly to ease the employment situation and help companies cope with cash-flow problems, it will submit a second supplementary budget for fiscal 2008 as late as in January to the Diet. The central bank should not lose any time in taking measures to rescue companies from fund shortages as the economic situation quickly deteriorates.

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