Business sentiment improves slightly

Business sentiment among large companies improved for the first time in two and a half years, but the general feeling remains one of continued economic gloom.

The Bank of Japan's Tankan quarterly survey released Wednesday showed that the diffusion index among large manufacturers stood at minus 48 in June, up from minus 58 for March, the worst level since the central bank started conducting the surveys in 1974.

The index is calculated by subtracting the percentage of companies reporting unfavorable business conditions from the percentage reporting favorable conditions.

The improvement was led by progress in inventory adjustment and recoveries in exports and production, according to the survey.

Although the increase may support the government's assertion that the economic downturn has bottomed out, the rise was lower than the predictions of private economic institutes and a full recovery is nowhere in sight.

According to the survey, conducted between May 26 and June 30 on about 10,000 companies, 52 percent of large manufacturers felt the economy was in "bad" shape.

Only 4 percent, including those in Japan's key auto and electronics industries, said the economy was "good," up by just 1 percentage point from the previous survey.

Tankan surveys in June usually show upward revisions in corporate investment plans for plants and equipment.

However, this time, large manufacturers revised downward, by a record 17.1 percent, their planned investments in plants and equipment for fiscal 2009.

The companies now predict these investments will represent a 24.3-percent plunge from the total spent in fiscal 2008, the sharpest expected decrease in June surveys.

The decline underscores corporate pessimism toward an upturn in domestic or overseas demand, especially when the future of the U.S. economy remains uncertain.

Exports remain at about 60 percent of the level before the current economic crisis started with the "Lehman shock" last September.

Industrial production is only about 75 percent of what it was in the pre-recession period.

Consumer spending also remains a problem because of lingering concerns about employment and wages. Businesses in the Tankan survey said they felt they not only had excess equipment, but also a surplus in workers.

The jobless rate rose to 5.2 percent in May, and companies are expected to cut summer bonuses by 18 percent compared with last year's pay.

With consumers hanging on to their incomes, the diffusion index for restaurant and hotel businesses dropped by 1 point to minus 46 in the latest Tankan survey.

The diffusion index for large nonmanufacturers improved 2 points to minus 29, the first rise in two and a half years.

But the index for small manufacturers remained stuck at minus 57, while the index for small nonmanufacturers fell by 2 points to minus 44.

The levels of diffusion indexes in the latest survey are still about the same as those when past recessions reached the bottom.

However, with low expectations for an upturn in either domestic or external demand, it is unclear what can lead the economy to a full recovery.(IHT/Asahi: July 2,2009)