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Thursday, Oct. 2, 2008

Industry's mood at five-year low

'Tankan' finds major drop in producer sentiment


Staff writer

The business confidence of big manufacturers dipped below zero for the first time in more than five years in the latest Bank of Japan "tankan" survey released Wednesday.

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Large manufacturers' business sentiment has dropped for four straight quarters and now stands at minus 3, down from plus 5 in the previous survey, according to the BOJ. The index last dipped below zero in the June 2003 survey.

Because 70 percent to 80 percent of responses to the tankan were submitted by Sept. 10, before the bankruptcy of Lehman Brothers Holding Inc. on Sept. 15 triggered the current turmoil in financial markets, the survey does not fully reflect the most recent business sentiment.

It does reflect Japan's economic slowdown.

The survey, which represents the percentage of companies reporting favorable business conditions minus the percentage of those reporting unfavorable conditions, was conducted between Aug. 27 and Tuesday, and covered 10,488 companies.

"Exporters have been worst hit from the slowdown of the U.S. and European economies," said Rei Tsuruta, an economist at Mitsubishi UFJ Research & Consulting Co.

Tsuruta pointed out that the operations of processing manufacturers, including industrial machinery producers and carmakers, are sharply declining, forcing them to cut back on investment.

Business sentiment in the industrial machinery sector dropped to 2 from 22 in the last survey, while confidence in the automobile sector stood at 5, down from 15.

"When the U.S. financial crisis starts to affect the real economy, exports will further decline," Tsuruta said, adding that exporters' prospects are bleak.

The mood among raw materials companies started to improve, however, as energy and raw materials prices began to stabilize and firms raised their prices, Tsuruta said.

Sentiment in the iron and steel sector jumped to 19 from minus 6, while the ceramics, stone and clay sector improved to minus 10, up from minus 16.

The tankan also shows that it is not only business sentiment that is plunging. Demand too is getting weaker, as the percentage of companies reporting excess demand minus the percentage of those reporting excess supply in the domestic and overseas markets dropped.

The index was minus 18 for the domestic market, down from minus 10 in the previous survey, while that for the foreign market was minus 6, down from 1.

Katsuhiro Oshima, an economist at Mitsubishi Research Institute, said the worst is yet to come.

"Most companies are still not sure how the financial crisis will affect their businesses," Oshima said, but the impact will be felt soon.

Asked when Japan's economy will recover, Oshima said it is likely to be in the latter half or the end of the next fiscal year at the earliest, which is a year to 18 months from now.

But if the passage of the U.S. bailout plan is further delayed, the United States is likely to enter a full-scale recession and further delay Japan's recovery, Oshima said.

"After all, Japan's recovery depends on overseas demand," he said.



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