Business sentiment mixed

The Bank of Japan’s “tankan” survey showed on Monday that business sentiment among major manufacturers greatly improved in the April-June period, with their diffusion index (DI) at plus 4. But the Abe administration should note that the DI for small and medium-size firms is still negative — minus 14 for manufacturers and minus 4 for nonmanufacturers. Apparently small and medium-size businesses are not benefiting much from the administration’s economic policy.

The Abe government also should pay attention to price increases of imported items due to a weakening of the yen caused by the BOJ’s massive monetary easing. Price rises could dampen consumer spending, thus putting a brake on economic recovery.

The DI for major manufacturers rose to plus 4 in the April-June quarter, gaining 12 points from the previous quarter. The DI for that sector has entered into positive territory for the first time since September 2011. The DI is the percentage of companies with positive business outlook minus the percentage of those with negative business outlook. The cheap yen helped the DI for the car industry rise 6 points to plus 16 and that for the steel industry jump 36 points to minus 2.

But price rises of imported resources due to a weaker yen is taking a toll on some industries. The sentiment for the oil and coal products sector went down 19 points to minus 6 and that for the electricity and gas sector fell 10 points to minus 18. Although the sentiment among small and medium-size companies is improving, it is still in negative territory, indicating that executives at many of these companies are cautious about their business prospects.

The sentiment for large nonmanufacturers improved 6 points to plus 12. Increased public works projects under the government’s emergency economic package helped improve the construction industry’s performance. The housing industry was helped by the last-minute surge in demand in anticipation of future interest rate increases and a consumption tax rate raise.

The sentiment for large retailers was plus 6 without any change from the previous sector. But small and medium-size retailers lost one point and came down to minus 12. Although rich people are increasing their buying of high-price items, the government must carefully watch overall consumer behavior.

There is a strong possibility that consumer confidence will deteriorate as prices of electricity and gas and food items, including wheat flour, bread and cooking oil, rise this month due to a weaker yen. Some companies may not be able to pass on the increased costs of imports to consumers, and the negative impact on their performance could lead to lower wages and workforce cuts.

Large businesses plan to increase their capital investment 5.5 percent in fiscal 2013 from fiscal 2012. But whether investments will increase further is uncertain because these firms feel they have excessive equipment on the books.

The government should consider encouraging companies to increase their investment in energy conservation and in the development of green energy sources, which will help reduce Japan’s reliance on nuclear power generation.

Businesses feel that banks are not very positive about lending money to them and that interest rates will increase in the future. The government and the BOJ need to rectify this situation, which has developed despite a policy of massive monetary easing.