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Outlook mixed for Japanese
economy
By Hussain Khan
TOKYO
- The Bank of Japan's massive quarterly survey of more
than 8,500 companies of all sizes across all industries
shows vastly improved sentiment among the largest
manufacturers. A majority of firms in virtually all
sectors reported improved business conditions and
optimism over the past three months - but they also
predicted a slowdown by March.
The Tankan, or
short-term, survey issued by the central bank last
Friday showed greater optimism among large manufacturers
from September to December 1. But it is still far from
certain that the economy will shift into a full-fledged
recovery. Most non-manufacturing sectors fared poorly,
consumer and household spending was weak and analysts
cited the potential negative impact of yen appreciation.
"A sense of caution about the outlook is
growing," said Kakutaro Kitashiro, chairman of the
influential business group Keizai Doyukai. "I am not
optimistic about the sustainability of the recovery."
The sentiment diffusion index, a measure of
business optimism, for large manufacturers surged to 11
by December, up from 1 in September - its highest level
in the six and a half years since June 1997. The figure
was much higher than the average market forecast and
projection of 6. It was the third consecutive quarterly
improvement in business outlook.
The Tankan
gives investors their most comprehensive look at how
Japanese companies view current business conditions and
short-term prospects. Much of the information is
expressed as diffusion indices, with positive numbers
indicating a larger percentage of companies seeing
improvement than the percentage holding a negative view.
Thus, the larger the positive number, the
greater the majority of companies expressing optimism.
The measure, a sort of confidence index, is calculated
by subtracting the percentage of firms with a
pessimistic view of their businesses from the percentage
of those with a positive outlook.
Stocks rose
on good news
Stocks rose on the good news in the
report and investor confidence was boosted further by
two other upbeat announcements last Friday, on
industrial output and commercial bankruptcy filings. The
Ministry of Economy, Trade and Industry said industrial
output rose a revised 1 percent in October from a month
earlier. The increase had initially been estimated at
0.8 percent, the third rise in the past four months.
Teikoku Databank, a private credit research
firm, reported that the number of corporate bankruptcies
fell to 1,136 in November, or down 20.7 percent compared
with the same period last year. It was the 11th
consecutive monthly decline.
Investors bought a
broad range of issues, encouraged by
stronger-than-expected business confidence.
The
225-issue Nikkei Stock Average rose 75.52 points, or
0.75 percent, to end the morning at 10,150.66 on Friday.
The broader Tokyo Stock Price Index (Topix) of all First
Section issues on the Tokyo Stock Exchange (TSE) added
6.07 points, or 0.61 percent, to 997.00.
Stock
prices of high-tech, semiconductor, steel and other
manufacturers rose on the Tankan results. In the
high-tech sector, Nikon surged 93 yen (US$0.86) or 7.2
percent to 1,388, custom chip maker Rohm by 490 yen or
4.2 percent to 12,040 and Advantest, the world's largest
maker of chip-testing equipment, by 260 yen or 3.4
percent to 7,960. Olympus, the world's second-largest
maker of digital cameras, rose 90 yen to 2,250, boosting
its gains over the past two days to 6.9 percent. And
Ricoh, a major manufacturer of copiers and other office
machinery, advanced 68 yen to 1,942, lifting its gain
over the past three days to 6.9 percent.
Among
semiconductor makers, Oki Electric jumped 19 yen or 5.2
percent to 383, Fujitsu by 18 or 3.1 percent to 598, and
Mitsubishi Electric by 11 or 2.6 percent to 433. In the
steel sector, industry leader Nippon Steel surged 7 yen
or 3.5 percent to 209, Sumitomo Metal Industries gained
2 or 2.1 percent to 98, JFE Holdings advanced 40 or 1.65
percent to 2,470, and Kobe Steel added 2 or 1.6 percent
to 130.
In addition to the Tankan, equities were
also supported by earlier rises in US stocks. Last
Thursday, the blue-chip Dow closed above 10,000 for the
first time in nearly 19 months, on better-than-expected
November retail sales data and an indication by the
Federal Reserve that it will keep interest rates low for
some time. The 30-issue Dow Jones Industrial Average
advanced by 86.30 points, or 0.87 percent, to 10,008.16.
The tech-heavy Nasdaq Composite Index rose 37.67 points,
or 1.98 percent, to 1,942.32.
Economic
recovery spreading but ...
For investors,
possibly even more significant than the improved
sentiment among manufacturers overall was the fact the
survey showed improvement throughout virtually every
sector. Among 15 manufacturing sectors, the diffusion or
confidence index for the non-ferrous-metal sector
rallied by 45 points, the largest-ever rise, to plus-10
in the December survey, followed by a 29-point jump in
the index for the coal and oil sector to zero.
Out of 15 sectors, 14 showed improvement,
indicating the economic recovery is spreading. The
survey also showed noteworthy improvement among certain
sectors of the service industry. In the large
non-manufacturing sector, especially wholesale trading
companies and transport, the outlook is improving.
Yet overall sentiment in the Japanese equities
market, which has soared this year as the economy picked
up, could be jolted if investors focus on how Japan's
leading manufacturers see the near future. Looking at
the negative side, the diffusion index for large
manufacturers is forecast at plus-8 for the Tankan
survey next March. That means that they expect the
economy to slow, and if investors focus on the negative
forecasts, the market will not react strongly.
Investors initially snatched up shares on seeing
that business confidence has improved, but they became
more cautious when looking at the downbeat projections.
Some financial analysts said the financial
markets did not react strongly to the Tankan this time,
since bond prices were almost unchanged and the yen
little changed against the dollar.
The report
contained negative news as well.
Non-manufacturers were lagging behind
manufacturers in taking advantage of the recent economic
upturn in Japan. The diffusion index for
non-manufacturers improved by only four points from the
September survey, less than half the gain posted by
manufacturers. The construction and telecommunications
sectors saw business sentiment deteriorate, and
retailers were struggling, apparently due to stiff
competition and stagnant household income.
Poor performance by
non-manufacturers
Although the economy appears to
be recovering, thanks to stronger exports and
production, a wide range of Japan's industry has yet to
benefit from the nascent economic rebound.
The
Tankan report shows a 20-point gap between the diffusion
indices for large manufacturers and non-manufacturers.
The gap has steadily widened from just four at the time
of the March survey, as manufacturers saw an increase in
exports while non-manufacturers suffered from stagnant
domestic demand. Similar polarization can be observed
between smaller manufacturers and non-manufacturers.
By industrial sector, the diffusion index for
auto makers improved by 11 points to 35. The figure rose
by 15 for precision-machinery makers and 12 for
electrical-machinery makers. The index surged by 45
points for producers of nonferrous metals used to make
electronics products. The indices for key manufacturers,
such as those making cars, precision equipment and
general machinery, are nearing the peaks reached during
the economic recovery of mid-1997.
In contrast,
key sectors of the non-manufacturing industry are all
turning in poor performances. The index for the
construction business slid three points to minus 29, due
to a decline in the number of public-works contracts.
And the figure for telecommunications companies dropped
by 18 because of the price wars that hurt their
mobile-phone and ADSL (asymmetric digital subscriber
line) broadband services.
The index for
retailers improved by only one point to minus-13. The
sector failed to recover much since the last survey
period when unseasonably cool weather dampened retail
sales.
"Overall consumer spending is still weak
despite brisk sales of digital home electronics products
probably because personal income is not rising," said
Toshikimi Kaneki, chief economist at Sumitomo Trust
& Banking Co.
The diffusion index of
employment conditions at large manufacturers improved by
2 points, but the figure still indicates that these
companies are carrying excess workers.
Limited improvement in capital
spending
Capital spending is another major
question mark. Small and midsize companies made major
upward revisions to their investment plans, suggesting
that improvement is widening.
Small and midsize
manufacturers made a better-than-expected showing in the
latest survey, with their diffusion indices improving by
nine to 10 points, comparable to the rise registered by
their larger counterparts. This indicates that the
export businesses of both small and large manufacturers
are doing well.
It remains unclear whether the
economy will begin a self-sustaining, long-term recovery
any time soon given the weakness of the
non-manufacturing sector. The economy is also vulnerable
to sudden shifts in export demand, particularly from the
US and Asian countries. Further, the survey reveals
other areas of concern, particularly weakness in
household spending and the potential negative impact of
yen appreciation.
The recent appreciation of the
yen is casting a shadow over the business outlook. If
the yen strengthens further and remains high for a
prolonged period, it could throw cold water on the
recovery. Expanding overseas demand is a major driving
force behind the improving outlook.
According to
the Tankan, the surveyed firms assume the US dollar will
average 114.68 yen in the year to March 2004, compared
with a forecast of 117.99 yen in the September survey.
For the second half to March, the surveyed firms
forecast an average rate of 111.40 yen, compared with
the previous estimate of 117.53 yen.
Large
manufacturers are assuming an exchange rate of 111.40
yen to the dollar for the fiscal second half, a
6-yen-plus appreciation in the value of the Japanese
currency compared with the September survey. This
contributed to the downward revision of pretax profit
forecasts by major manufacturers. But the recent rise of
the yen to the 106 level, after breaking the barrier of
107 per dollar, will force manufacturers to further
revise their estimates downward and may even affect the
export potential of most of them.
Large
manufacturers, meanwhile, are forecasting an 11.1
percent year-on-year increase in capital spending in
fiscal 2003 from the prior fiscal year, provided the yen
appreciation remains within the limit of their
projections. But this marked a zero increase from the
September survey, showing no sign of the type of
accelerating investment that is typical in a period of
economic expansion.
Hussain Khan holds
a master's degree in economics from Tokyo University and
has worked in Japan as an equities analyst. He is an
independent Tokyo-based analyst on current affairs and
economic issues for various newspapers and magazines.
E-mail hk@ourquran.com.
(Copyright 2003 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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