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Wednesday, July 2, 2008

Sentiment tanks in latest 'tankan'

Materials, oil price surges bode ill for third straight quarter

Staff writer

Business sentiment among large manufacturers plummeted in June for the third straight quarter, with rising oil and raw material prices gouging into profits, according to the Bank of Japan's "tankan" survey released Tuesday.

Business confidence for major manufacturers came to 5, down from 11 in the central bank's last quarterly survey conducted in March.

It is the worst since September 2003, when the index hit 1.

The index represents the percentage of companies reporting favorable business conditions minus those reporting unfavorable conditions.

"The economy is getting worse," said Mitsuo Fujiyama, economist at Japan Research Institute Ltd.

Higher oil and materials prices are pushing up costs for businesses while domestic consumers are hesitant to purchase products, pushing down sales, Fujiyama said.

The survey's index of wholesale prices, which represents the percentage of firms reporting a rise in wholesale price minus those reporting a fall, was 59 — the highest since May 1980 for big manufacturers.

The index for small and midsize manufacturers also hit its highest point since May 1980.

"Japan may be entering a period of recession," said Katsuhiro Oshima, an economist at Mitsubishi Research Institute. "But it is hard to judge because (the economy) is showing a new pattern."

Normally when there is a recession, Oshima said, economic surveys show typical symptoms such as falling demand and excessive inventory. But that is not the case with the current economy.

"Companies are suffering from higher (materials) costs, but at the same time demand is rising in emerging countries," he said. "So it's not as bad as it seems."

In the tankan, the index for demand minus supply from overseas at big manufacturers was 1, which indicates demand is still stronger than supply overseas.

Despite the worsening results in the BOJ's quarterly survey, economists generally agree the central bank will not raise its benchmark interest rate anytime soon.

"The BOJ is looking at both sides — inflation and concern for economic slowdown," said Fujiyama of Japan Research Institute. "So the answer is not to do anything for now."

Conventionally, the BOJ raises the interest rate in times of inflation and cuts the rate if the economy slows. Fujiyama predicted the central bank will not change the rate until the middle of next year.

The tankan also showed that major manufacturers are pessimistic about the future.

Business confidence for the next three months came to 4 — lower than the present reading of 5 — meaning major manufacturers believe business will be bleak in the near future.

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The Japan Times

Article 1 of 11 in Business news


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