— Adds Details, Economist Comments Throughout

TOKYO (MNI) – Business confidence among large Japanese
manufacturers was unchanged In March from three months ago, defying
expectations for a rise during the quarter, the results of the Bank of
Japan’s closely watched Tankan corporate sentiment survey released on
Monday showed.

The Tankan survey headline index — showing current business
sentiment among large manufacturers — stood at -4, unchanged from -4 in
December.

The benchmark March figure came in weaker than the MNI survey’s
median of -1, with economists’ forecasts ranging from -6 to +3.

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

The impact of brighter global growth prospects and the recent rise
in stock prices as well as the pullback of the yen’s rise on corporate
sentiment was limited, clouding somewhat the outlook for an export-led
recovery in Japan.

The Tankan also showed that corporate executives expect their
business sentiment to improve only slightly in the coming three months,
with respondents in the March survey expecting the headline index to
rise to -3 in June.

The Tankan results aren’t consistent with the outcome of a
government survey of business confidence.

The Economy Watchers’ Survey index for Japan’s current climate in
February marked the first rise in two months while the outlook index hit
a near five-year high on eased fears over the yen’s rise hurting a
recovery.

In the government survey, the forward-looking index, which gauges
conditions two to three months ahead, jumped to 50.1 in February from
47.1 in January, posting a second straight monthly rise. The February
level was the highest since 51.9 marked in April 2007.

According to the March Tankan, the average dollar-yen exchange rate
assumed by major manufacturers in their business planning for fiscal
2012 just begun is Y78.14, compared with Y79.02 in the previous survey.

The yen has depreciated to around Y83 to Y84 after hitting a
record high of Y75.32 to the dollar last October.

“If the yen continues to weaken or stay where it is now, upside
risks to the business sentiment may emerge,” said Takeshi Minami, chief
economist at Norinchukin Research Institute. “Given tht excess capacity
is also receding, capital investment plans may also be upgraded.”

“Having said that, small businesses are likely to face continued
challenges due to surging procurement costs due mainly from rising
commodity prices. This will eat into profit margins at not only small
firms but also bigger ones,” he added.

Japanese large non-manufacturing firms remained more confident than
manufacturers. Business confidence among large non-manufacturers
improved for the third consecutive quarter, rising to +5 from +4 three
month earlier.

The index is expected to remain unchanged at +5 in June.

But the sentiment index for small manufacturers worsened to -10
from -8 in December, declining for the first time in three quarters.

This index is expected to worsen further to -15 in June.

The index for smaller non-manufacturers rose to -11 from -14 in
December, up for the third consecutive quarter.

But the index is expected to worsen to -16 in June.

The Tankan also showed that business investment plans by major
manufacturers for fiscal 2012 are expected to rise 3.6% from a year
earlier (the first estimate).

In March, major manufacturers said that they planned to increase
their capital investment by 2.7% in fiscal 2011.

Despite the worsening of sentiment among smaller manufacturers,
their estimated current profits this fiscal year are expected to rise
sharply to +15.8% from -2.3% last fiscal year.

Current profits by smaller firms, including non-manufacturers, this
fiscal year are likely to rise 10.5% on year, up from a 7.2% rise last
fiscal year.

The survey also showed that all major firms, including
non-manufacturers, expect their capital spending to be flat from a year
earlier in the current fiscal year, compared with the 1.1% rise last
fiscal year.

Capex plans by large firms were not in negative territory at the
start of the new fiscal year (found in March Tankan surveys) for the
first time since the March 2007 Tankan, when large firms planned +2.9%,
a BOJ official said.

Business investment plans by all industries for the current fiscal
year is -1.3%.

Small businesses forecast their capex will fall 12.9% from a year
earlier vs. the 8.5% fall last fiscal year.

Under normal circumstances, smaller firms tend to gradually revise
up their investment plans as the fiscal year progresses.

The Tankan showed that sales in all sector in the current fiscal
year are estimated to rise 1.4% from a year earlier, down from the 1.5%
rise in fiscal 2011.

In addition, all sectors expect their current profits to rise 2.1%
in this fiscal year, up from a 9.4% fall in last fiscal year.

Large companies are forecasting a 1.1% fall in current profits this
fiscal year, up from an estimated 15.4% fall in last fiscal year.

Meanwhile, smaller firms expect their current profits to rise 10.5%
for this fiscal year, up from a 7.2% rise in last fiscal year.

In the March survey, sentiment among automakers improved from three
months ago as the drag from last year’s supply chain breakdown in
flood-hit Thailand has eased and as renewed government subsides for
buying low-emission vehicles have supported new car sales.

Sentiment among large electronics firms and business machinery
makers also improved. In the face of sluggish sales of digital TVs since
rush purchases last July, economists expected sentiment for consumer
electronics makers to be down, but a recovery in supply chains and
inventory adjustments may have led to the improvement, a BOJ official
said.

But large carmakers, whose sentiment improved to +28 in March from
+20 in December, projected their index would worsen 17 points to +11 in
June.

Sentiment among large electric machinery makers rose to -17 in the
latest survey from -21 in the previous one and they predicted it would
improve further to -7 in three months’ time.

The March Tankan results showed that Japanese firms feel they are
still laden with excess production capacity and employees, suggesting
that corporate executives were cautious about resuming investment in
plant and equipment, hiring new graduates or raising salaries.

But the survey also showed that excess production and sales
capacity among major manufacturers eased slightly last quarter.

Among major manufacturers, the diffusion index for production
capacity — the percentage of firms reporting excess capital minus the
percentage of firms reporting the opposite — worsened to 10 from 9 in
December.

The production capacity index for small manufacturers worsened to
12 from 10 at the previous Tankan.

In March, manufacturers reported that both sales prices and
procurement costs fell from three month ago.

The diffusion index for sales prices remained in negative territory
(more firms saw lower prices) while that for costs was positive (more
felt higher prices).

In the latest survey, 10,894 firms, or 98.6%, responded, compared
with 10,846 firms or 98.9%, in the December survey.

The March survey was conducted from February 23 to March 30.

tokyo@marketnews.com
** MNI Tokyo Newsroom: 81-3-5403-4833 **

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