Japan business sentiment hit by strong yen – BoJ

Japanese business confidence has weakened for the first time in nearly two years, the Bank of Japan said yesterday, as the economy has been hit by a soaring yen and global economic uncertainty.

The closely-watched quarterly Tankan survey showed sentiment worsening – albeit not as fast as expected – as global and domestic economic woes have sapped corporate optimism, particularly among exporters.

In the survey, the confidence index for large manufacturers dropped to “five” from “eight” in September – the first fall in seven quarters but slightly better than market expectations of a reading of “three”.

The index measures the percentage of firms that say conditions are good minus those that say conditions are bad – meaning that any figure above zero indicates general, if cautious, optimism in the corporate sector.

Japan, which relies heavily on exports of cars, electronics and machines, has been battered by a strong yen, which makes its goods less competitive abroad and erodes companies’ overseas profits when repatriated.

The yen has touched 15-year highs against the dollar in recent weeks and traded at 83.81 to the greenback in Tokyo yesterday morning.

Economic growth in the July-September quarter this year was last week revised up to an annualised 4.5 per cent, but government ministers warned growth would be “substantially lower” in the fourth quarter.

The Tankan – which surveys a total of more than 11,000 companies – also found that sentiment among large non-manufacturers fell to “one” from “two” in the previous survey, but it beat the expected score of “zero”.

Looking ahead, the latest Tankan survey said the forecast among big manufacturers for the March survey is for “minus two”, suggesting that companies expect conditions to worsen in the months ahead.

The latest Tankan survey reflected “deep-rooted caution about the yen’s appreciation and the overseas economy,” Naoki Murakami, chief economist at the Monex online brokerage house, told AFP.

But the fact that the index remained in positive territory showed that “in reality, the business climate has not deteriorated to the level that had been feared by the corporate sector”, Mr Murakami said.

After the recent expiry of eco-car subsidies, “business conditions in the auto sector have worsened, but improvement was seen in industries related to capital investments, such as steel, metal and machinery,” he said.

The Bank of Japan looks at Tankan surveys when it sets monetary policy. It will hold a board meeting next Monday and Tuesday – but analysts believed the result was not bad enough to spur more monetary easing.

“The Tankan shows some fall-off related to the end of the eco-car subsidies, but the overall view for the Japanese economy will not be so bad,” Chotaro Morita of Barclays Capital Japan told Dow Jones Newswires.

The central bank has kept interest rates near zero to boost sluggish domestic demand and this year injected new cash into financial markets through asset-buying schemes in a bid to pump-prime the economy.

The centre-left government this week also said it would shave five percentage points off the 40.7 per cent corporate tax rate to boost investment, keep companies from moving abroad, create jobs and increase wages.

Critics worry how the government will make up for the revenue shortfall at a time when it is already struggling to reduce a mountain of public debt almost twice the size of the five-trillion-dollar economy.