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Tuesday, July 3, 2007

'Tankan' shows big makers still optimistic

Positive outlook could spell a BOJ rate hike as early as next month

Staff writer

Business sentiment for big manufacturers remained optimistic in the Bank of Japan's latest "tankan" survey released Monday, fueling market speculation the central bank will raise the interest rate as early as next month.

The BOJ's quarterly survey showed that business confidence for large manufacturers stayed positive at 23, following a fall from 25 to 23 in the January-March period.

The index for large manufacturers is projected to drop to 22 for the next quarter through September, the BOJ said.

The tankan registers the difference between companies reporting favorable and negative business conditions, with a positive number indicating optimism and a negative number pessimism.

"The prospect for a rate hike in August remains unchanged," said Katsuhiro Oshima, an economist at Mitsubishi Research Institute. "The tankan result will not be a decisive factor for the BOJ to move forward or delay the next rate hike."

Many market watchers expect that a credit-tightening step by the BOJ may come at next month's Policy Board meeting Aug. 22 and 23, with the benchmark short-term interest rate to be raised from the current 0.5 percent.

Oshima said that although the domestic economy is at a standstill with the U.S. economy slowing down and oil prices rising, the tankan showed that companies are not as pessimistic about the future as he anticipated.

"The factors having a negative impact on the Japanese economy are clear and they are showing signs of recovery," said Oshima, explaining the seemingly optimistic outlook.

Hideo Kumano, chief economist at Dai-ichi Life Research Institute, agreed, saying optimism among businesses is growing as more people believe the U.S. economy is poised to expand again.

Kumano pointed to the strong investment trend shown in the tankan to underline his opinion. Large manufacturers plan to spend an average of 11.2 percent more than a year ago on plant and equipment, the survey showed.

Kumano predicted the BOJ will not raise the interest rate before the Upper House election July 29.

"It is either August or September," he said.

According to the tankan, confidence at auto and steelmakers dropped but shipbuilders, heavy machinery firms and oil refineries saw business booming compared with three months ago.

Business sentiment stayed flat at 22 for large nonmanufacturers.

Small enterprises, about half of the some 10,000 companies surveyed, were less optimistic about their prospects. Small manufacturers' sentiment dropped to 6, down from 8 in the previous survey.

The diffusion index for employment conditions, or the gap between the percentage of firms with excess labor and those with labor shortages, at big companies in all industries registered minus 11, compared with minus 13 in the previous survey.

It is projected to register minus 14 in the three months through September.

This means companies are still short of workers although the condition has improved from the last poll.

The central bank conducted the survey of 10,839 companies, of which 98.9 percent responded, from May 28 to last Friday.

For related stories:
Big-firm confidence negative for first time since '04
Business sentiment dropping: 'tankan'
'Tankan' likely to show drop: poll

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