Economy remains shaky

The Bank of Japan’s tankan business sentiment survey showed on April 1 that confidence among major manufacturers improved in the first quarter of 2013 — the first improvement in three quarters. Their diffusion index (DI) stood at minus 8, up from minus 12 three months earlier. The index represents the percentage of firms saying business conditions are good minus those saying they are bad. The DI for major nonmanufacturers was plus 6, an improvement of two points.

Major firms also expect good business in the near future. The DI for three months later is minus 1, an improvement of seven points, among major manufacturers and plus 9, an improvement of three points, among major nonmanufacturers.

But attention also must be paid to the fact that other data show that the conditions of small and medium-size companies are still difficult and that executives have a cautious attitude toward the longer-term future prospects of the Japanese economy.

The DI for small and medium-size manufacturers fell one point to minus 19, a fall for five consecutive quarters, although the DI for nonmanufacturers of a similar size went up three points to minus 8, the first improvement in three quarters.

Major manufacturers expect that their current account profits will increase more than 10 percent in fiscal 2013 from fiscal 2012 thanks to the weakening of the yen caused by the Abe administration’s economic policy. But executives as a whole are not sure about what will happen in and after 2013.

Capital investment (except for software) planned by major companies for fiscal 2013 is 2 percent less than in fiscal 2012. This shows that it will take some time before business performance results in wage increases for workers.

Private sector demand for machinery (not including demand for ships and power generation equipment) in January, made public in March by the Cabinet Office, showed the first decline in four months. Since that demand figure serves as a leading indicator, it is cause for concern.

Although the yen is currently trading at ¥90 to ¥95 against the dollar, the BOJ tankan survey shows that large manufacturers expect that the yen exchange rate will be slightly above ¥85 to the dollar in fiscal 2013. Fueling their thinking is concern about economic conditions overseas.

Rises in the prices of imported raw materials caused by the cheap yen have affected the steel and textile industries. The DI for the steel industry dropped 10 points to minus 38 and that for the textile industry fell two points to minus 15.

The unemployment rate in February increased 0.1 point from January to 4.3 percent. The consumer price index in February showed a decline for four consecutive months, pointing to continuation of deflation. The Abe administration needs to seriously consider what it can do to improve the real economy.