TOKYO (MNI) – Business confidence among large Japanese
manufacturers worsened in December for the first time in seven quarters,
hit by the slowdown of the global economy and increased uncertainty over
a sustained domestic recovery amid the yen’s rise, the Bank of Japan’s
latest quarterly Tankan survey released Wednesday showed.

The Tankan survey headline index — showing sentiment on current
business conditions among large manufacturers — fell to +5 in December
from +8 in September.

The index is expected to worsen further to -1 in March, according
to the survey.

The December reading was the lowest since +1 in June 2010. The last
drop was seen in March 2009, when the index slumped 22 points to -31.

In the previous Tankan in September, the reading stood at +8, the
highest since June 2008 (+5) — before the global financial crisis —
and also the first positive reading since then.

The benchmark December figure came in better than the consensus
call for a drop to +3, with economist forecasts ranging from +1 to +8.

“The recovery trend in business sentiment has been halted and it is
expected to worsen further ahead,” Shuji Kobayakawa, head of the
Economic Statistics Division at the BOJ, told reporters.

The diffusion index is calculated by subtracting the percentage of
companies reporting deteriorating business conditions from the
percentage of those reporting an improvement. A positive figure
indicates the majority of firms see better business conditions.

The trend of improving business sentiment for the sixth straight
quarter until September reversed in December in the wake of the downturn
in exports and production, hit by the slowdown of overseas economies.

Japan’s trade surplus expanded 2.7% in October from a year earlier
to Y821.9 billion ($9.9 billion), slowing notably from the revised 52.8%
growth posted in September.

The pace of export growth on a year-on-year basis also decelerated
for an eighth consecutive month, as shipments to the European Union fell
for the first time in 11 months and the growth in exports to the United
States moderated.

Japanese industrial production fell 2.0% in October from September,
revised down from a preliminary 1.8% drop and marking the fifth straight
monthly decline after -1.6% in September.

Output was dragged down by lower demand for passenger cars as well
as electronic parts and devices, as seen in preliminary data.

The assumed dollar-yen exchange rate expected by major
manufacturers is Y86.47 in the December Tankan survey, stronger than the
average Y89.66 in the previous Tankan.

This was the highest dollar-yen rate assumed by firms since the BOJ
began compiling this segment of the Tankan survey for fiscal 1996.

The appreciation of the yen has eased after the Japanese currency
hit a fresh 15-year high of Y80.21 on Nov. 1. The dollar was quoted
under Y83 on Wednesday morning.

Sentiment among exporters, including automakers as well as
manufacturers of electrical machinery, worsened in December from three
months ago. Moreover, exporters expect their sentiment to worsen
further in the next three months.

Large carmakers, whose sentiment worsened to +21 in December from
+32 in September, foresee their index plunging 21 points to 0 in March.

Sentiment among large electric machinery makers fell to +2 in the
latest survey from +14 in September and they expect it to worsen to 0 in
three months time.

“The downturn in sentiment among carmakers in December was not as
sharp as forecast in September but the sector remains cautious going
forward,” said the BOJ’s Kobayakawa.

Business confidence among large non-manufacturers also worsened for
the first time in seven quarters, though to a lesser extent than among
manufacturers, falling to +1 from +2 in September.

The December figure for large non-manufacturers was also slightly
better than most analysts had expected. The MNI survey median of
economists’ forecasts was zero, with estimates ranging from -3 to +1.

The sentiment index for small manufacturers improved to -12 from
-14 in September, up for the sixth straight quarter. But the index is
expected to deteriorate sharply to -23 in March.

Better sentiment among smaller manufacturers was led by the lumber
and wood products, iron and steel as well as production machinery
sectors.

The index for smaller non-manufacturers fell to -22 from -21, down
for the first time in six quarters. The index is expected to slip
further to -29 in March in the face of continued sluggish domestic
demand.

Commenting on overall non-manufacturers sentiment, Kobayakawa said,
“The downturn in sentiment has spread to wholesale and transport.”

“The retail sector tends to see stronger business ahead, so it was
unusual for it to see weaker figures (for March). This is due to
the fading effects of the heat wave and tobacco tax hike,” both of which
boosted consumer spending in Q3.

Sentiment among small retailers plummeted to -30 in December from
-4 in September, with the 26-point drop the largest since the BOJ began
covering this sector in May 1983.

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