— Correcting Median Forecast To +3 From +4 In 3rd Paragraph of Story
Published at 0305 ET on March 25
— Most Firms Likely Responded to March Survey Before
March 11 Quake
— See Separate Table For Details Of Individual Forecasts

By Shigeo Kodama

TOKYO (MNI) – The Bank of Japan’s Tankan quarterly survey gauging
business sentiment among major Japanese manufacturers will show the
second consecutive quarter-on-quarter drop in March, according to the
median forecast of economists surveyed by Market News International.

The BOJ will release the outcome of its March Tankan survey at 0850
JST on Friday, April 1 (2350 GMT Thursday).

The headline diffusion index (DI) is forecast at +3 in March, down
from +5 in the previous survey in December 2010. The forecast level for
the March survey would be the lowest since +1 in June last year.

Analysts also forecast that the index would fall further to +1 in
the June survey.

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.

Economists said sharp increases in international commodity prices
as well as the far-flung impact of the March 11 earthquake and tsunami
will weigh on business sentiment.

After the Great Hanshin Earthquake hit western Japan on Jan. 17,
1995, the drag on corporate sentiment appeared to be limited. The BOJ’s
Tankan survey at the time showed that the major manufacturers’ index
improved from -14 in November 1994 before the quake, to -7 in February
1995 just after the quake and further to -4 in May 1995.

But economists polled said that wide-spread dampening effects on
sentiment would be inevitable this time.

Unlike the 1995 quake, the latest disaster has sparked fears of
sustained radiation leaks from the damaged Fukushima Dai-ichi nuclear
power plant, since contaminated farm produce has already been found in
and around the Fukushima Prefecture. In addition, radiation has been
detected in water treatment facilities as far away as Tokyo, which is
located more than 200 kilometers southwest of the plant.

The deadly quake and tsunami have caused an acute shortage of
electrical power from Tokyo Electric Power Co, prompting the firm to
implement rolling blackouts in Tokyo and neighboring cities. This is
curtailing factory production and retail store hours.

The combined GDP of Tokyo and eight other prefectures to which
TEPCO supplies electricity accounted for about 40% of Japan’s total GDP
in 2007.

Meanwhile, economists warned the full negative impact of the quake
on corporate sentiment will not be seen in the March tankan survey.

In March last year, the BOJ conducted the Tankan survey between
Feb. 23 and Mar. 31, with 70-80% of surveyed firms responding by the
BOJ’s suggested date of March 10.

The March 2011 survey is being conducted between Feb. 24 and Mar.
31, with a suggested response date of Mar. 11, the day of the
earthquake. This would suggest that a majority of surveyed firms had
already responded before the quake struck and that actual business
sentiment could be much worse than what the Tankan results will
indicate.

The Tankan’s major manufacturer index bottomed out at -58 in March
2009 following the collapse of Lehman Brothers in September 2008. The
index showed a gradual recovery to +8 in September 2010, which was the
highest since +11 in March 2008.

Meanwhile, the major non-manufacturers’ index is expected to stand
at +1 in March, unchanged from December but down from +2 in September
last year.

The small business DI among manufacturers is seen dropping to -15
in March from -12 in December. The expected March level would be the
lowest level since -18 in June 2010.

The sentiment index for small non-manufacturers is expected to slip
to -23 in March from -22 in December. The former would be the lowest
since -26 in June 2010.

Capital investment plans by major firms in fiscal 2011 are expected
to show a 1.0% rise. For capex plans in a March survey, that would be
the highest since +2.9% marked in March 2007.

Capital investment plans stood at -0.4% y/y in March 2010, -6.6% in
March 2009 and -1.6% in March 2008.

The quarterly government survey conducted on Feb. 15 and released
on March 16 showed companies expected their combined capital spending to
fall 0.5% in fiscal 2011.

Business investment plans by small firms for fiscal 2011 are
expected to show a 18.0% y/y decline, which would be the best level for
a March survey since -17.7% seen in March 2007.

Small firms tend to revise up their capital investment plans
gradually as the fiscal year progresses.

skodama@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4838 **

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