Japan Firms' Mood Bleak, BOJ Tankan Likely Grim

Big Japanese manufacturers were much more pessimistic about business conditions in the three months to March compared with the previous quarter, a government survey showed, as the economy wallows in deep recession.

CNBC.com

The data comes ahead of the Bank of Japan's closely watched quarterly corporate survey due out on April 1, and economists are betting that the BOJ survey will show very bleak numbers as well.

"The data confirmed a worsening mood among companies as their bottom line deteriorates, and the outlook for demand remains uncertain," said Junko Nishioka, chief economist Japan, at the Royal Bank of Scotland. "The BOJ tankan is likely to show a record pace of decline in sentiment."

Export-oriented companies have taken a severe blow because overseas demand has evaporated as the financial crisis drags leading economies into a deep slump.

Makers of automobiles and electronic appliances, which often have a number of smaller manufacturers in their supply chains, have been hit especially hard, making the gloom widespread in the sector.

The business survey index (BSI) of sentiment at large manufacturers in the January-March quarter was minus 66.0, compared with minus 44.5 in October-December, according to a joint survey by the Ministry of Finance and the Economic and Social Research Institute, an arm of the Cabinet Office.

Companies expect business conditions to improve somewhat in April-June, with the big manufacturers' outlook index for the second quarter coming to minus 27.0, up 39 points from the current quarter.

But companies are usually upbeat in their outlooks. Big manufacturers had expected an improvement in the index for this quarter when they gave their outlook at the end of last year.

Manufacturers are withholding capital spending plans as the sharp drop in demand has prompted them to cut production at an unprecedented pace.

Companies expect capital investment to drop 10.3 percent in the current business year to March 31 and plan to slash capital spending by 29.4 percent next business year.

"Capital expenditure numbers for fiscal 2009 are weaker than I expected. Sentiment is pessimistic, and this pessimism is warranted given weak external demand," said Akira Maekawa, senior economist at UBS Securities. "The BOJ's tankan survey is coming up and the consensus is that business sentiment plunged."

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The Reuters monthly tankan, which tracks the BOJ's survey, showed last week that manufacturer sentiment hit a record low of minus 78, down 4 points from the previous survey and worse than the previous record low of minus 76 in January.

Japan's economy shrank 3.2 percent in October-December, marking the biggest contraction since the first oil shock in 1974, and many economists expect a similar contraction in the current quarter.

The BSI measures the percentage of firms that expect the business environment to improve from the previous quarter minus the percentage that expect it to worsen.

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