Japan's business confidence weathers financial storm

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TOKYO, Oct 1 (AFP): Japan's top executives remain upbeat despite recent financial market turmoil, with business confidence holding steady close to a two-year high, a central bank survey showed today.
Companies also upgraded their plans for spending on new factories and equipment slightly, helping to keep the overall economic recovery on track.
But while major manufacturers remained more optimistic than expected, non-manufacturers and smaller companies turned more cautious, according to the Bank of Japan's closely watched Tankan survey of over 10,000 firms.
Business confidence among large manufacturers was stable at 23, close to last December's two-year high of 25, indicating sentiment remains generally upbeat. But the manufacturers forecast a drop to 19 by December.
Economists had predicted, on average, that the index would fall to 21 due to increased uncertainty about the health of the US economy in the wake of a credit squeeze sparked by rising defaults in US subprime, or risky, mortgages.
The index represents the percentage of firms reporting favourable business conditions minus the percentage of pessimistic ones.
At the same time confidence among big non-manufacturers fell to 20 from 22 in June.
"Japan seems to have benefitted from firm exports in the third quarter but I think domestic demand weakened somewhat," said Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo.
"The retail sectors are not doing so well which means consumption was not that strong in the third quarter," he said, adding that the survey was not robust enough to justify another rise in Japanese interest rates this year.
The Bank of Japan in September refrained from hiking its super-low interest rates from 0.5 per cent for a seventh straight month amid lingering deflationary pressures and recent financial market volatility.
Investors generally took a positive view of the survey, with the Nikkei-225 share index rising 0.39 per cent by the lunch break. The yen was steady at 114.80 yen, unchanged from late Friday in New York.
"Fortunately Japan has not been badly damaged by the subprime-related problems in the US so the turmoil seen overseas did not show up in the Tankan results," said Saburo Matsumoto, forex strategist at Sumitomo Trust Bank.
Major companies of all industries upgraded their plans for capital investment in new equipment and factories this year.
They now expect to spend 8.7 per cent more in the year to next March than in the previous year, compared with a planned increase of 7.7 per cent at the time of the June Tankan survey.
Firms of all sizes expect to boost capital expenditure by 4.9 per cent this year, up from 3.1 per cent previously.
The survey "showed that fundamentals were firm because capital expenditure was revised up, while the employment conditions index showed the possibility of corporations hiring proactively," said Yasuhiro Takahashi, an economist at Nomura Securities Financial and Economic Research Centre.
Robust spending by major Japanese companies on new factories and equipment has been a key driver of a recovery in the world's second largest economy after a slump stretching back more than a decade.
But a recent drop in spending caused the Japanese economy to contract in the three months to June, raising concerns about the growth outlook even as the US economy loses steam.
Shirakawa said the results of the Tankan survey suggested that the Japanese economy is likely to have grown by more than two percent on an annualised basis in the third quarter of 2007.