Japan: Good times in the short
term By Richard
Hanson
TOKYO - Even the economists
were surprised, pleased with the short term but
concerned about long-term prospects of sustainable
economic recovery.
A closely watched measure of
business sentiment among large Japanese manufacturers
shows a considerable jump in June from the three months
before, reflecting one of the most encouraging financial
quarters in nearly 13 years, a Bank of Japan (BOJ)
survey showed Thursday.
The central bank's
tankan (short-term) quarterly survey showed that
its measure for large manufacturers' current business
conditions stood at plus 22, thus coming close to the
plus 25 marked in August 1991.
The BOJ's
mathematical gauge of the current business sentiment of
large manufacturers, known as the Diffusion Index (DI),
recorded plus 22 for June, up sharply from plus 12 for
the three months ending in March. This was the fifth
quarterly rise in a row, the central bank said.
But with the good news flowing in, central
bankers also warned that continued high growth in the
economy in the next few weeks and months may prompt a
hard look at Japan's current "zero" interest rate
policy, which since the start of this decade has been a
key tool in fighting the scourge of deflation.
On Wednesday, the US Federal Reserve lifted a
key interest rate by 0.25% to 1.25% to protect against
inflation. Japan's discount rate is virtually zero, but
continued brisk growth in the next two quarters could
prompt re-evaluation among the monetary authorities. At
the moment, the BOJ has stuck to its deflation-fighting
stance.
The latest DI reading was considerably
better than the forecasts that were polled from research
institutions (economists and analysts) by Jiji Press.
They ranged from plus 14 to plus 19.
Just about
everyone sees the improvement as a reflection of Japan's
economic boost from exports to China and other parts of
Asia. But, as earlier indicators also showed, companies
have been investing corporate capital in Japan. Much of
that is a reflection of the surge in demand for digital
consumer electronics.
Business leaders naturally
welcomed the strong figures. "Japan's economic recovery
is becoming broader-based," said Nobuo Yamaguchi,
chairman of the Japan Chamber of Commerce and Industry.
But a private banker cautions that there are
warning signs on the horizon. Individual savings are
being reduced at banks, reflecting years of low returns
for interest rates. Uncertainty shows up in the
tankan survey among smaller companies, which are
uncertain whether the current economic growth will be
sustained long enough for them to pay off large debts
accumulated over the previous decade.
Current
business conditions in the DI for large
non-manufacturers stood at plus 9, compared with plus 5
for March. The index for small manufacturers rose from
minus 3 to plus 2, coming back to positive territory for
the first time since November 1991. The index continued
to improve for the ninth straight quarter.
The
DI represents the gap between the percentage of firms
experiencing favorable business conditions and those
that are doing poorly.
What struck some
observers was that the indicator came close to, but
didn't exceed, the plus 25 level marked in the August
1991 survey. That was a tumultuous era as the
post-bubble excesses of the late 1980s produced a
numbing string of financial and other criminal scandals.
What followed was a decade of rolling economic
recessions and, among other things, crises among banks,
insurers and brokers.
The outlook for the next
tankan survey is also not particularly strong.
The latest survey said the business condition outlook DI
toward September stood at plus 21 for large
manufacturers and at plus 11 for large
non-manufacturers. That is already slipping from June.
Among big manufacturers, the electric machinery
sector saw the index shoot up 19 points to 25 on the
back of robust sales of digital home appliances ahead of
the Athens Olympics in August. But the restaurant/hotel
sector as well as trucking companies posted higher
indexes, and department stores and other retailers had
lower scores, indicating that the recent rise in
domestic demand has benefited each non-manufacturing
sector differently.
Looking toward September
when the next survey will be conducted, big
manufacturers expect the index to dip one point and
non-manufacturers to see a rise of two points.
There are some analysts who are not happy at all
with the outlook. Kazuhiko Ishida, chief researcher at
the Japan Center for Economic Research, thinks that
Japan is not yet on the path to a sustainable economic
recovery, despite the stronger-than-expected results of
the latest survey.
According to Ishida, only a
handful of large manufacturers, such as raw
materials-related firms and electric machinery makers -
sectors that are supported by foreign demand, were
upbeat, while business sentiment at non-manufacturers
improved only moderately.
Ishida said that those
large manufacturers, which are optimistic about their
present business conditions, are cautious about their
future prospects, and that strong-performing
manufacturers also appear skeptical of the
sustainability of the current economic recovery reliant
on foreign demand. He also echoes concerns over
still-weak consumer spending.
The tankan
survey was conducted between May 26 and June 11,
targeting 10,416 companies, including 2,426 large firms.
More than 90% of the companies responded by mid-June,
when the Nikkei Stock Average was moving above 11,000
and the yen was trading at about 108 to the dollar.
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