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Saturday, Oct. 2, 2010
Hard times ahead for firms
A Bank of Japan tankan survey shows that business sentiment measured by the diffusion index among big manufacturers in the three months through September was plus 8, a rise of seven points from the previous quarter, marking improvement for six consecutive quarters. The diffusion index (DI) represents the percentage of firms reporting favorable business conditions minus that of firms reporting unfavorable environments.
The index among big nonmanufacturing firms was plus 2, also a rise of seven points from the previous quarter and improvement of six straight quarters.
But the survey shows that enterprises are worried about future economic conditions. The DI among big manufacturing and nonmanufacturing firms for three months later is minus 1 and minus 2, respectively. For the first time since December 2008, three months after the collapse of Lehman Brothers Holdings Inc., major manufacturers' sentiment three months ahead is worse than their current sentiment.
Small and midsize enterprises are in a similar situation. The DI among small and midsize manufacturers for the July-September period was minus 14, an increase of four points from the previous quarter and improvement for five consecutive quarters. The corresponding figure among small and midsize nonmanufacturing firms was minus 21, an increase of five points from the previous quarter and improvement for also five consecutive quarters.
But both manufacturing and nonmanufacturing companies in this category expect their economic environment to deteriorate after three months.
In summary, executives of both large and small companies fear that the economy may stall and suffer a second dip in the near future. Especially companies in automobile industry, a driving force of the Japanese economy, are highly pessimistic about the future conditions. The DI among large manufacturing firms in the industry for three months ahead was minus 6, a fall of 38 points from the July-September quarter, the largest drop since the current DI survey covering automobile industry was first conducted in 1992, and the corresponding figure for small and midsize manufacturing companies in the industry was 52 points lower than in the July-September period — also the biggest fall.
With a government subsidy program for purchase of eco-friendly cars in force, last-minute demand for such cars had pushed the DI among large automobile-related manufacturers to plus 32 for the July-September quarter. But the termination of the program in September and the strong yen will likely make the business environment for the auto industry difficult.
Exports to emerging economies including China have greatly contributed to Japan's economic recovery. But the continuation of the strong yen and the deterioration of Japan-China relations caused by the arrest and release of a Chinese fishing trawler captain following his vessel's collision with two Japan Coast Guard patrol boats inside Japanese territorial waters near the Senkaku Islands in the East China Sea cast a pall over the prospect of exports to emerging economies.
Japan's reliance on China for its exports is great. China's share in Japan's total trade reached 20.5 percent in 2009, much larger than the U.S.'s share of 13.5 percent. But there is the possibility that the repercussions of the Senkaku issue will stay for a long time, which will negatively impact trade between Japan and China.
The BOJ's intervention in foreign currency markets shortly after the yen's value against the dollar rose to ¥82.80 — the first intervention in 6 1/2 years — appeared to have worked at least temporarily. But the trend for a strong yen is likely to remain as long as the U.S. economy fails to attain a strong recovery.
The current situation demands that the Japanese economy be turned into an economy that is free from excessive dependence on exports. In addition to exports, the Japanese economy requires stable domestic demand. To create a domestic demand-driven economy, pulling the Japanese economy out of deflations is indispensable.
Deflation persists. A BOJ survey, for example, shows that the price index for services for enterprises in August fell to a record low since the statistics were first taken in 1985, marking 23 consecutive months of decline. The BOJ must take every available means of monetary easing to stop deflation.
The Kan administration will submit a supplementary budget for fiscal 2010 to the Diet. Small and midsize firms, which are lagging behind major firms in economic recovery, need prompt government action to help them. The government must also speedily implement measures to nurture industries that will help create new domestic demand, such as agriculture, environment-friendly industries and industries related to medical, nursing care and child-rearing services. It should tackle the task of changing Japan's industrial structure in earnest.