Japanese business sentiment has deteriorated across the board, according to the widely watched Tanoan survey, although the fall was not as bad as many feared and capital investment plans remained reasonably firm at large manufacturers.
The headline diffusion indices, which subtract pessimists from optimists, beat consensus forecasts even though large manufacturers fell from 11 to five points and large non-manufacturers fell from 12 to 10. There was a sharp deterioration in sentiment at shipbuilders and steel and motor manufacturers, where companies face a severe margin squeeze.
The large manufacturers index has fallen 16 points from its peak 15 months ago, bringing it to a five-year low. However, there were abrupt falls of 30-40 points during downturns in the 1990s, according to Macquarie Securities.
Large manufacturers predicted a 10 per cent fall in pre-tax profits this fiscal year, reflecting deteriorating terms of trade as they struggled with higher oil and material input costs. Hiroko Ota, economy minister, acknowledged that companies were straining to absorb higher costs but said, "overall, it is not a situation where sentiment is collapsing". Capital spending plans were solid at large companies, which expect to lift spending by 2.4 per cent in the year to March 2009, though small companies expect a fall of 20 per cent.
Kiichi Murashima, Nikko Citigroup's chief economist, said: "Today's Tankan sends mixed signals. Corporate profits are plunging. But business investment plans are holding up well."
Japan's 10-year bonds fell sharply on the better-thanexpected survey, pushing up yields 8 basis points to 1.670. Equity traders were not cheered, as the Nikkei index continued a nine-day losing streak.
There was some evidence that businesses were more confident about passing on higher input costs to consumers, with improvements in the output price diffusion indexes in all categories of companies. However, Edwin Merner, a fund adviser at Atlantis Investment Research in Tokyo, warned: "There is a lag effect. You can't pass on all of the price increase right away. There's a lot of resistance.
Mr Merner also pointed out that Japan was more energy efficient than many of its competitors, making it more able to withstand higher oil prices. Kyohei Morita, chief economist at Barclays Capital in Tokyo, said: "I think the best word to describe the Japanese economy is 'stagnation'." But he added, assuming that the US economy picked up in the third and fourth quarter as the effect of tax rebates kicked in, Japan too should experience a "modest recovery".
Ian Bright, head of strategy and economics in London at Pali International, a broker, was more pessimistic, saying smaller companies continued to fare much worse than the headline grabbing large manufacturers, Overall, he said: "The export engine is slowing, the investment engine has stalled or gone into reverse and consumption is weak."
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Under syndication arrangement with FE
