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TOKYO (MNI) – The Bank of Japan’s closely watched Tankan corporate
sentiment survey released on Thursday showed that business confidence
among large manufacturers worsened in December from three months ago
after a rebound the previous quarter.

The Tankan survey headline index – showing current business
sentiment among large manufacturers – worsened to -4 in December from +2
in September.

The benchmark December figure came in weaker than the MNI survey’s
median of -2, with economists’ forecasts ranging from +5 to -5.

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

The worsening of the leading figure underscores the threat posed to
Japan’s export-led recovery by the global economic slowdown, the strong
yen, and supply chain restrictions in flood-hit Thailand.

Corporate executives expect business conditions to worsen further
in three months, amid heightened uncertainty over overseas demand and
concerns about adverse effects of the European sovereign debt crisis.

The respondents in the December survey expect the headline index to
fall to -5 in March.

The Tankan survey also continued to show a gap in sentiment between
export-oriented manufacturers and other sectors dependent on domestic
demand.

Business confidence among large non-manufacturers improved for the
second consecutive quarter, rising to +4 from +1 three months earlier.

However, the index is expected to fall to 0 in March.

The sentiment index for small manufacturers improved to -8 from -11
in September, up for the second consecutive quarter, thanks in large
part to the boost to domestic demand from earthquake reconstruction
efforts.

However, this index is expected to worsen to -17 in March.

The index for smaller non-manufacturers rose to -14 from -19 in
September, also up for the second consecutive quarter.

But the index is expected to worsen to -21 in March amid ongoing
uncertainty over domestic demand amid severe labor and income
conditions, and a hollowing out of industry.

The Tankan also showed that capital spending plans by major
manufacturers are revised down from three months ago.

In December, major manufacturers said that they plan to increase
their capital spending by 6.2% this fiscal year, compared with the
10.1% rise estimated in the previous survey.

The survey also showed that all major firms, including
non-manufacturers, expect their capital spending to rise 1.4% from a
year earlier in the current fiscal year, lower than the 3.0% rise
forecast in the previous survey.

Small- and medium-sized firms forecast their capex will fall 12.3%
from a year earlier, improving from the 17.7% fall expected in the
previous survey.

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 1.9% from a year earlier, down from an
estimated 2.0% rise at the previous survey.

In addition, all sectors expect their current profits to fall 4.8%
in this fiscal year, down from a 2.4% fall in the previous survey and
sharply reversing from the 38.3% rise last fiscal year.

Large companies are now forecasting a 9.0% fall in current profits
this fiscal year, down from an estimated 4.3% fall in the previous
survey.

Meanwhile, small- and medium-sized firms expect their current
profits to rise 7.2% for this fiscal year, up from +4.1% forecast at the
previous survey.

In the December survey, sentiment among automakers improved from
three months ago but sentiment electronics firms and business machinery
makers worsened.

Large carmakers, whose sentiment improved to +20 in December from
+13 in September, foresaw their index improving one point to +21 in
March.

Sentiment among large electric machinery makers fell to -21 in the
latest survey from -5 in the previous one but they predicted it would
improve to -17 in three months’ time.

The assumed dollar-yen exchange rate expected by major
manufacturers this fiscal year is Y79.02, according to the December
Tankan, compared with an average Y81.15 in the previous survey.

The dollar traded at around Y78.08 in Tokyo early Thursday morning.

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

Among major manufacturers, the diffusion index for production
capacity — the percentage of firms reporting excess capital minus the
percentage of firms reporting the opposite — stood at 9, unchanged
from September.

The production capacity index for small manufacturers stood at 10,
improving from 11 at the previous Tankan.

In the latest survey, 10,846 firms, or 98.9%, responded, compared
with 10,910 firms, or 98.8%, in the September survey.

The December survey was conducted from Nov 14 to December 14.

tokyo@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4833 **

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