Japan business confidence rises, but uncertainty still looms

Japanese business confidence has improved for a sixth straight quarter but companies are expecting a glo­omy end of the year amid increased global economic uncertainty, the Bank of Japan said yesterday.

Sentiment among major manufacturers rose to a higher-than-expec­ted reading of eight in September from one in June, according to the central bank’s closely watched Tan­kan survey of more than 11,000 firms.

The latest figure shows that optimists still outweigh pessimists among major manufacturers in terms of their view of Japan’s economic climate, in only the second positive reading since June 2008.

But the forecast for the December survey is for a reading of minus 1, suggesting that companies expect conditions to sharply worsen in the months ahead as Japan remains beset by deflation and the effects of a strong yen.

“Companies are very cautious about the economy towards the year-end,” noted Naoki Murakami, chief economist at Monex Securities.

In particular, there was “increasing uncertainty about the world economy and the (Japanese) government’s dull responses to the chain reaction of the yen’s rise and stock price falls.”

The strong yen has hurt exporters, making their goods more expensive and eroding companies’ overseas profits when repatriated. Video­game giant Nintendo yesterday more than halved earlier profit forecasts, citing yen strength.

Exports, a crucial driver for Japan’s growth, expanded at their slowest pace this year in August, as the impact of the yen’s strength and softening overseas demand illustrated the risks threatening a fragile recovery.

A strong domestic currency also makes imports cheaper, helping prolong a damaging deflationary cycle where consumers hold off on purchases in the hope of further price drops, clouding future corporate investment. The reading was made with companies expecting an exchange rate of 89.44 yen to the dollar, higher than in the previous survey but much lower than current levels, which if sustained will further erode confidence.

Japan stepped into the currency markets in September for the first time since 2004 in a bid to stem the yen’s strength after it hit a 15-year high against the dollar, and has repeatedly warned it is ready to do so again.