Japan business confidence is up for 6th straight quarter, but growing clouds loom

Japan business confidence rises

TOKYO — Business confidence in Japan rose for the sixth straight quarter, but companies fear the improvement is temporary as cooling global growth and a persistently strong yen hurt shipments to overseas markets.

The Bank of Japan’s quarterly “tankan” survey of business sentiment released Wednesday showed that the main index for large manufacturers rose to 8 from 1 three months ago.

The figure represents the percentage of companies saying business conditions are good minus those saying conditions are unfavorable, with 100 representing the best mood and minus 100 the worst.

On the surface, it was an encouraging result, beating Kyodo News agency’s average market forecast of 6. Stocks advanced to send the benchmark Nikkei 225 index up 0.6 percent.

The optimism, however, looks likely to be short-lived. Big manufacturers predict that sentiment will fall back into negative territory toward the end of the year, underscoring growing doubts about the durability of Japan’s economic recovery amid sustained strength in the yen.

The country has seen “a tremendous recovery in the past 18 months,” said Richard Jerram, head of Asian economics at Macquarie Securities. “But the momentum is fading quite quickly, and there are concerns that the yen strength could tip it back down again.”

The tankan is a closely watched barometer of the country’s economic health and helps the central bank guide monetary policy. Analysts said the outlook reinforces the need to fight the strong yen and could compel the central bank to consider new monetary easing steps when it meets next week.

Trade figures earlier this week confirmed that export growth — the main driver of Japan’s recovery — is slowing.

The deceleration poses a serious threat to Japan, which has depended on the rest of the world to offset lackluster demand at home. But that expansion looks increasingly precarious as countries unwind stimulus measures that had underpinned global demand.

Moreover, Japanese exporters such as Toyota Motor Corp. and Sony Corp. face the onslaught of a strong yen, which hit fresh 15-year highs against the U.S. dollar this month. That led authorities to intervene in currency markets to weaken the yen for the first time in more than six years.

An appreciating yen shrinks the value of repatriated profits for exporters and makes their products less competitive overseas. Toyota has said that every 1-yen climb versus the dollar saps 30 billion yen ($357 million) from operating profit. Japanese electronics company Sharp Corp. is moving some flat-panel TV production to China to insulate itself from the strong yen.

The Japanese currency has strengthened about 10 percent against the dollar this year. The government’s intervention on Sept. 15 initially pushed the dollar above 85-yen levels, but the Japanese currency has gradually recovered and was trading under 84 yen to the dollar Wednesday.

The tankan showed that companies are assuming the dollar will average 89.66 yen this fiscal year — a considerably different level than reality. That points toward downward revisions of corporate profits and deteriorating sentiment, said Masamichi Adachi, senior economist at JPMorgan Securities Japan.

The “continued high level of yen should be significant drag on profits” among manufacturers, he said in a note to clients.

The central bank maintains that Japan is enjoying a modest recovery but acknowledges growing headwinds. Bank of Japan Gov. Masaaki Shirakawa told business leaders in Osaka on Monday that the government would intervene again if necessary.

The BOJ “has great interest in and will pay close attention to developments in the foreign exchange markets and their impact,” he said.

Amid the uncertainty, Prime Minister Naoto Kan unveiled a new 915 billion yen ($10.9 billion) stimulus package earlier this month to help the jobless find work and encourage consumer spending. More money — as much as 4.6 trillion yen ($54.6 billion) — may be on the way if Kan draws up an extra budget for this fiscal year as expected.

The mood among big non-manufacturers improved to 2 from minus 5 in June. They also expect the index to turn negative over the next several months.

Small- and medium-sized enterprises reported higher numbers, though their business conditions continued to lag. The confidence index for medium-sized manufacturers rose to 4 from minus 6 three months ago. The small manufacturers’ index stood at minus 14, up from minus 18.

Big companies indicated they planned to increase capital investments by 2.4 percent this fiscal year through March 2011.

The Bank of Japan surveyed a total of 11,283 companies between Aug. 23 and Sept. 28. Almost 99 percent responded.