The Bank of Japan’s tankan survey of business sentiment in March, whose results were released Monday, shows that major manufacturers are cautious about their business prospects. Their diffusion index (DI) for March — the percentage of firms optimistic about their business outlook minus the percentage of firms pessimistic about their business outlook — was minus 4. This matches December’s result and marks the second consecutive quarter of negative figures. Their DI for this coming June was minus 3, a slight improvement.

In contrast, the DI of major nonmanufacturing firms for March was plus 5, up one point over December, and that for June was plus 5, the same as in December. One factor behind this rather positive outlook is the brisk sales of smartphones.

The Japanese economy as a whole is mildly recovering thanks to demand driven by reconstruction efforts in areas hit by the 3/11 disasters and a slight weakening of the yen. But the tankan survey shows that factors such as the unstable political situation created by the government’s plan to raise the consumption tax, fear of summer power shortages due to the shutdown of nuclear power plants, the sovereign debt crisis in Europe and rising oil prices amid tensions over Iran are keeping a lid on optimism among manufacturers.

It is important for the government and the central bank to vigorously implement measures to underpin the Japanese economy while businesses must strive to expand sales.

A resumption of subsidies for eco-friendly cars is helping the car industry, pushing carmakers’ DI for March to plus 28, up eight points from December. Their DI for this coming June at plus 11 is 17 points worse than their DI for March, reflecting fears that economic conditions will deteriorate. The recovery of electronic makers is slow primarily due to sluggish sales of thin-display televisions.

The BOJ’s Feb. 14 decision to introduce a 1 percent inflation target and to increase its financial asset purchase program by ¥10 trillion helped to weaken the yen a bit. But there is a possibility that the U.S. Federal Reserve will take additional easy money measures to prevent a cooling down of the U.S. economy as gasoline prices rise. This would again lead to selling of the dollar and buying of the yen, pushing up the yen’s value. This makes it all the more essential that the BOJ be ready to adopt further easy money policies.

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