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Business confidence among Japan's big manufacturers slipped

Written by: Staff

TOKYO, Apr 3: Business confidence among Japan's big manufacturers slipped unexpectedly in the three months to March, though an upbeat outlook and robust capital spending plans suggested continued economic growth, a Bank of Japan survey showed on Monday.

The influential quarterly tankan survey showed the headline diffusion index (DI) for large manufacturers fell for the first time in four quarters to plus 20, compared with the market's forecast of a rise to plus 23 and plus 21 in December.

Materials sectors like steel and textiles were hit by soaring oil and raw materials prices, but the data did little to cool speculation that the BOJ, which last month ended a five-year-old policy of flooding the banking system with excess funds, would soon raise interest rates from present levels near zero.

''I'm expecting the BOJ to end the zero rate policy in July-September, and today's numbers strengthened my conviction,'' said Takehiro Sato, executive director at Morgan Stanley.

''Employment and production capacity indices, which the BOJ closely watches, showed improvements. The output gap is likely narrowing, supporting the BOJ's cause for ending the zero interest rate policy.'' Supporting such views, big manufacturers expected conditions to improve over the next three months, with their outlook DI for June at plus 22.

''The (tankan) outcome was very solid,'' BOJ Governor Toshihiko Fukui told reporters. He added that businesses were seeking a steady economic expansion, which meant that the economic recovery would last for a long time.

Japanese government bond (JGB) yields, which have been rising steeply since the March 9 BOJ policy change, extended gains after the tankan. The benchmark 10-year yield rose to 1.845 percent, hitting its highest level since August 2004.

The BOJ next holds a monetary policy meeting on April 10-11, although it is not expected to raise rates just yet as it has yet to finish mopping up excess liquidity in the money market that was left as the legacy of quantitative easing.

Companies however are wary of rising borrowing costs. The tankan DI for big firms' borrowing rates jumped to plus 10 in March from plus 2 in December -- the highest reading since September 2003 and indicating that more firms believe borrowing costs will rise.

The DI for the June outlook was plus 32.


The yen weakened on the survey but the Tokyo stock market's Nikkei average rose 1.60 percent to end at 17,333.31, its highest close in more than 5-{ years.

Many analysts cited robust spending plans -- which are usually conservative in March tankan reports before being revised upward later in the year -- as a sign that the economic recovery and an upturn in prices would continue.

Large companies expected their capital expenditures in the new financial year that began on April 1 to rise 2.7 percent from a year earlier, the biggest increase for a March survey since 1990, when capital spending rose 5.0 percent.

''The diffusion index was slightly weaker than expected but capital spending plans by big firms weren't bad for the start of a business year,'' said Mamoru Yamazaki, senior economist at HSBC Securities Japan.

The generally upbeat market reception comes amid growing evidence that Japan's economy, which grew an annualised 5.4 percent in the last three months of 2005, has climbed out of a seven-year deflation that had dampened investment and aggravated the banking sector's bad loan problem.

The tankan's latest headline DI was high compared with a trough of minus 38 four years ago, reflecting the strength of the recovery.

Among industries showing improvement, the DI for electrical machinery firms improved to plus 20 in March, the highest since September 2004. However the DI for the steel sector showed a drop of 10 points in June outlook, the biggest deterioration among big manufacturers.

Diffusion indexes are derived by subtracting the percentage of negative responses from that of positive ones.

Another bright sign in the tankan poll, which was taken between Feb. 27 and March 31, was growing employment.

The employment DI for big manufacturers was minus 1, indicating a shortage of workers. It was the first such shortage since May 1992.

The March DI for large non-manufacturers inched up to plus 18 from plus 17 in December, the highest since plus 20 in February 1992. The June forecast DI for those companies was plus 19.

Sentiment among small firms is still lagging. The March DI for small manufacturers was flat at plus 7, and the index for small non-manufacturers slipped to minus 9 from minus 7.


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