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Friday, Oct. 5, 2012
Sagging business sentiment
The tankan survey of business sentiments for September by the Bank of Japan shows that uncertainty hovers over the Japanese economy. If necessary, the central bank should take additional monetary easing measures since injecting ¥10 trillion into an assets purchase fund Sept. 19. The government needs to take short- and long-term steps to buoy the economy.
The diffusion index (DI) for major manufacturers for September was minus 3, marking the first drop in nine months. The DI represents the percentage of firms that say business prospects are good minus those that say business prospects are bad.
Major manufacturers' DI for business prospect three months later was also minus 3. The worsening of the DI is mainly attributable to weak production and exports caused by a slowing Chinese economy and other overseas economies amid European sovereign debt problems.
Government subsidies for people who purchase eco-friendly cars had helped car-related industries, but those subsidies were ended in late September. Car sales in terms of the number of units decreased 3.4 percent in September from the same month of 2011.
The DI for September for major nonmanufacturers leveled off at plus 8. Conditions for the construction industry are firm thanks to demand related to reconstruction from the 3/11 disasters. But the retail industry is sluggish because summer bonuses decreased. Major nonmanufacturers' DI for three months later is plus 5, lower than that for September.
Attention must be paid to the difficult conditions for medium-size and small companies. The DI for medium-size and small manufacturers is falling — minus 12 for June, minus 14 for September and minus 16 for three months later. The DI for medium-size and small nonmanufacturers is also trending down.
Large companies, in an effort to improve their profitability, may demand that subcontractors reduce the prices of products they supply to them. The government must watch the behavior of large companies and take necessary steps to protect subcontractors.
The dispute between Japan and China over the Senkaku Islands will continue to negatively impact Japanese enterprises doing business in China. Meanwhile, U.S. economic conditions are likely to become worse because as a yearend fiscal cliff of tax increases and cuts in federal spending approaches.
To prevent the Japanese economy from losing steam, the government may have to intervene in the foreign exchange market to maximize the effect of the Bank of Japan's monetary easing measures. At present, the government is being forced to cut back on its execution of the fiscal 2012 budget because a bill to float bonds to cover more than 40 percent of the fiscal 2012 budget has not been enacted. The Diet must act quickly to enact the bill.