Jap business hits 4year lo
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Japanese business confidence hits four-year low; rate outlook divided - Business sentiment among large Japanese manufacturers weakened to the lowest level in more than four years as executives worried about the impact on profits of rising oil prices, a slowing U.S. economy and a stronger yen, a central bank survey showed on Tuesday. Strong earnings at Japanese companies had supported the growth of the world's second-largest economy in recent years and economists warned that a downturn in the profit trend could send the world's second-largest economy into a recession. They also warned that the Bank of Japan (BoJ) could cut interest rates if the Tankan painted a gloomy corporate sector. The BoJ kept interest rates unchanged for the 15th straight month in March. The central bank said early on Tuesday that the sentiment index for large manufacturers fell to 11 in March from 19 in December. It was the lowest reading since December 2003 when the index hit 7, and was below market expectations. Economists had forecast the index to come in at 13, on average, based on a poll by Thomson Financial News. It was the second straight quarterly decline. The Tankan survey covers more than 10,000 companies. The big manufacturers predicted a further deterioration in business conditions in the months ahead, with the headline index forecast to fall to 7 in June. ""The sentiment index dropped at a pace that is equal to the pace seen in the past recession phase,"" Goldman Sachs Securities chief economist Tetsufumi Yamakawa said. ""The Tankan also showed a broadly-based deterioration of other sectors, forcing the Bank of Japan to revise down its optimistic economic scenario,"" he said. Helped by a weak yen and brisk exports, companies posted record earnings in recent years that allowed them to invest heavily in new equipment and factories. But many companies are now looking to cut back on their capital spending to cope with an expected drop in earnings amid fears of a U.S. recession and the continuing financial market turmoil that has pushed the yen sharply higher against the dollar. For the new fiscal year to March 2009, companies of all sizes and industries forecast a 5.3 percent decline in their capital investment, the biggest drop since March 2003. Japanese companies have also cut their forecast for pretax profits for the fiscal year that ended yesterday, now predicting a fall of 1.6 percent compared to an earlier forecast for a 1.1 percent rise. Businesses expect pretax profits to recover in the current fiscal year and are looking at a 2.4 percent increase. ""Given the optimistic export hedging rate set by the surveyed companies, the downside risk to the new fiscal year profit forecast seems to be high,"" NLI Research Institute senior economist Taro Saito said. Executives tweaked their dollar-yen forecast to average 115.17 yen in the year ended March 31, compared to the previous estimate of 116.07 yen in December. For the year to March 2009, they forecast an average hedging cost of 109.21 yen. Recession risk ""As profit growth is now poised to turn around, the risk of the Japanese economy entering a recession is growing,"" NLI's Saito said. For the Japanese central bank, the deterioration of business sentiment at small- and mid-sized companies, as well as non-manufacturers, are equally worrisome. Small- and mid-sized companies employ the majority of Japanese workers. The index for small manufacturers was minus 6, the lowest showing since December 2003 when it hit minus 10, and down from plus 2 in December. The index for small non-manufacturers fell to minus 15, the weakest level since September 2004 when the index stood at minus 17. ""Small- and mid-sized companies, which have been struggling due to the deterioration of terms of trade stemming from difficulties in hiking selling prices, presented such cautious capital spending plans for the year to March 2009, as was often seen in the early phase of the past recession,"" Mitsubishi UFJ Securities senior economist Tatsushi Shikano said. Spending cut Small- and mid-sized companies have projected a 24.2 percent cut in their combined capital spending in the current fiscal year, the biggest decline since the March 1999 poll when they forecast a 26.2 percent drop. ""Because the Tankan suggests the need to revise the BoJ's argument about the virtuous cycle, the BoJ may cut interest rates at one of two policy board meetings in April,"" Goldman Sachs' Yamakawa said. The BoJ will hold its next policy board meeting from April 8 to 9 and will meet again on April 30 when it releases the semi-annual outlook report on the Japanese economy and prices. It has been arguing that since the virtuous cycle growth in production, income and spending remains intact, the possibility is high that the Japanese economy can extend its modest growth under a stable price environment. But other analysts think differently. ""It was understandable for corporate executives to turn wary about the business conditions, given such shocks as the subprime loan crisis and the surge in crude oil prices,"" said Masamichi Adachi, a senior economist at JP Morgan Securities. ""But the Tankan survey by no means strengthened the likelihood of a recession in Japan, as a stable movement of production capacity and labour indexes suggest that the perception from the long-term viewpoint remains unchanged,"" he said. The production capacity diffusion indexes, which measure the number of companies that believe they have excess production capacity minus those that believe they have too little, was zero in the March poll and was unchanged from the reading in December. The labor diffusion indices, which measure the number of companies that believe they have excess workers minus those that believe they have too few came in at minus 9 in the March poll, compared to minus 10 in the December survey. But this index is projected to reach minus 10 in June, suggesting corporate Japan feels that there is a strong labour shortage. ""Therefore, the Tankan suggests that the Japanese economy stayed away from a recession, and that there will be no rate cut in the April-June quarter,"" JP Morgan's Adachi said. Tokai Tokyo Securities chief economist Mitsuru Saito agrees. ""Unless we saw a deterioration of the production capacity and labour indexes, just as we witnessed in the past recession phase, it is premature to jump to the conclusion just with the decline of the sentiment index that the Japanese economy is entering a recession,"" Saito said. ""And unless the global economy starts to slow down beyond wild expectations, which is highly unlikely given the relative strength of Asia and oil-producing nations, there is no need for the Bank of Japan to lower interest rates,"" he said.
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