Japanese business confidence has slumped to the lowest level in almost five years on worries about soaring raw material costs, a weaker economy and a stronger yen, the central bank said yesterday.
Top executives have grown more pessimistic about the outlook for profits and remain cautious about ramping up investment in new plants and factories, the results of the Bank of Japan’s closely watched Tankan survey showed.
Confidence among major manufacturers tumbled to five in June from 11 in March, the survey of more than 10,000 companies found. Market forecasts had been for a figure of four.
It was the third straight quarterly decline, pushing sentiment down to the worst level since September 2003 when the index stood at one.
The index represents the percentage of firms experiencing favorable business conditions minus the percentage of those seeing unfavorable conditions.
Japan’s corporate sector has been a major driving force of a recovery in the world’s second-largest economy after years in the deflation doldrums.
Helped by a weak yen and brisk exports, companies have enjoyed record earnings in recent years and expanded their global production facilities.
But firms are growing more cautious about ramping up spending on new plants and equipment because of soaring raw material costs and a weaker global economy, raising fears Japan’s economic recovery could stall temporarily.
Firms of all sizes and industries plan on average to reduce their capital spending 1.4 percent in the fiscal year to next March, the central bank said.
The survey “doesn’t suggest that capital expenditure is going to collapse,” said Lehman Brothers economist Hiroshi Shiraishi, who thinks the Japanese economy still looks likely to escape a severe downturn.
“But the developments over the past few weeks are fairly worrying given the continuing pick up in oil prices and the deteriorating outlook for the US economy,” he said.
The combined pretax profit before extraordinary items of all the companies is expected to drop 4.4 percent in the current fiscal year.
With the business climate getting tougher, top manufacturers predicted a further deterioration in the headline sentiment index to a figure of four in September.
Investors took the survey results in their stride, with the Nikkei-225 share index up 0.33 percent by the lunch break.
Confidence has fallen sharply from a two-year high of 25 seen in December 2006 but it is still much higher than a low of minus 38 struck six years ago.
Sentiment among big non-manufacturers slipped to 10 in June from 12 in March, with confidence among small and mid-sized firms also deteriorating, the survey showed.
Japan’s economy is on the mend after a slump stretching back more than a decade, but sluggish consumer spending has raised concern that the country’s export-led recovery is vulnerable to the global economic slowdown.
“The next stage seems to be that falling profits will start to have an impact on domestic demand” as companies pay smaller bonuses to workers, resulting in weaker consumer spending, Shiraishi said.
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