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Japan's businesses poised to recover from post-quake slump

Japan's Finance Minister Yoshihiko Noda.

YURIKO NAKAO/Yuriko Nakao/Reuters

Big Japanese manufacturers turned pessimistic about business conditions for the first time since the global financial crisis in the aftermath of the March 11 earthquake and tsunami but expect improvement in coming months, a Bank of Japan survey showed on Friday.

The survey's headline sentiment index was weaker than forecast, but it was broadly consistent with the central bank's view that the economy will recover by the end of this year after the March disaster knocked Japan back into its second recession in three years.

"The tankan shows the deterioration in sentiment was not deep, as was the case with the Lehman shock which severely hurt demand, but it also indicates that recovery ahead is likely to be patchy, with big automakers and electric appliance makers leading the way but small firms lagging," said Junko Nishioka, chief economist at RBS Securities in Tokyo.

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"The BOJ's future policy is likely to be determined more by the degree of slowdown in overseas economies and financial market moves than by Japan's economic indicators."

The BOJ is likely to upgrade its view of output and the economy at its rate review this month, although it will also signal its caution about the risk of a global slowdown, said sources familiar with the central bank's thinking.

Still, while factory output is poised for a "V-shaped" recovery as manufacturers quickly restore supply chains, service firms and small businesses are less optimistic about the outlook, the survey showed, a sign that domestic demand remains weak and any rebound in the economy may not be broad-based. Separately released data showed that while the jobless rate fell in May, household spending slumped from the previous year.

Finance Minister Yoshihiko Noda told Reuters in an interview he expected the economy to recover later this year and achieve steady growth in the next fiscal year starting in April 2012.

Analysts had expected sentiment to deteriorate in the June quarterly tankan, the first to fully reflect the impact of the deadly natural disaster that triggered the world's worst nuclear accident since the Chernobyl disaster 25 years ago.

The headline index measuring big manufacturers' sentiment as the difference between the percentage of optimists and pessimists - stood at minus 9 in June, down from plus 6 in March and below a median market forecast of minus 6.

It was the first time pessimists outnumbered optimists since March 2010, when Japanese firms were still reeling from the financial turmoil triggered by the collapse of Lehman Brothers late in 2008.

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But analysts pointed out that in contrast to a deep and protracted slump in confidence during the financial crisis when the headline index sank as low as minus 58 in the first quarter of 2009, the impact of the March 11 disaster was likely to be fleeting.

Markets took the tankan results in their stride as they did not change the dominant view that companies were gradually recovering from the huge initial shock from the quake.

"I don't think the tankan will have much impact on the bond market, which is focused squarely on factors abroad," said Koichi Ono, senior fixed income strategist at Daiwa Securities Capital Markets in Tokyo.


Big manufacturers expect conditions to improve over the next three months with the index for September seen at plus 2. That was roughly in line with a median forecast of plus 3.

The survey also showed big firms plan to raise their capital spending by 4.2 per cent in the financial year to March 2012, more than the market's median forecast for a 2.2 per cent rise.

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One concern may be the impact of the strong yen on corporate profits. Big manufacturers' average dollar/yen estimate for the current fiscal year, at 82.59 yen, the strongest yen level since comparable data became available under the tankan in 1996.

Mr. Noda also highlighted the yen's strength as one of the factors that could drive more Japanese companies to shift production abroad. But he said the government would act to counter the currency's "disorderly moves and excessive fluctuations" rather than target certain levels.

The pain from the March earthquake may persist longer for small firms and service sector companies, which benefit less from global growth than big exporters.

Big non-manufacturers' sentiment worsened 8 points to minus 5 and the index measuring conditions three month ahead remained negative at minus 2.

Pessimists far outnumbered optimists among small non-manufacturers, which expect business conditions to worsen further toward September, the data showed. Signs that companies were passing on at least some of the higher costs of fuels and raw materials suggested subdued consumer sentiment was likely to persist.

The so-called core-core consumer inflation index, which excludes food and energy prices and is similar to the core index used in the United States, rose 0.1 per cent to mark the first annual increase in nearly three years, reflecting the broadening upward price pressure from high commodity costs. But analysts say that with household demand weak, Japan is unlikely to make a sustained, clear exit from deflation any time soon.

Japan's economy probably contracted for three consecutive quarters through June but is expected to grow 1.0 per cent in the third quarter, as factory output rebounds from a steep slump just after the quake, according to a Reuters poll.

A political stalemate over unpopular Prime Minister Naoto Kan's departure also risks slowing efforts to recover from the March disaster and could delay steps to tackle structural problems including massive public debt.

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