Monday, October 3, 2011

Japan's big manufacturers expect conditions to improve

Japan's big manufacturers expect conditions to improve in the next three months, according to the Bank of Japan's Tankan survey.

The business sentiment index stood at plus two for September, up from minus nine in June, the survey showed.

Confidence was badly damaged by the March 11 earthquake, but factory output is now increasing as supply chains are restored and infrastructure rebuilt.

The survey is keenly watched and influences Japan's monetary policy.

"Manufacturers are planning a sizeable output expansion in the next few months, so we expect conditions to improve even further," Takuji Okubo of Societe Generale told the BBC.

External risks

However, despite the optimism, big firms in Japan revised down their plans for capital expenditure.

According to the survey, large businesses plan to increase capital expenditure for the current financial year by 3%, down from an earlier projection of 4.2%.

Analysts said that while things have started to improve in Japan, external factors continue to dampen spirits.

There have been concerns that the ongoing debt crisis in Europe may hurt growth in the region. At the same time, economic problems in the US have raised fears of the world's biggest economy slipping into a recession.

"The biggest concerns are external, not internal, such as the impact of Europe's debt problems on global growth," said Yutaka Shikari of Mitsubhishi UFJ Morgan Stanley Securities.

There are fears that if growth in these regions slows, it would have an impact on consumer spending and hurt demand for Japanese exports.

Analysts said that until a long-term sustainable solution was found to these issues, they are likely to impact the expansion plans of Japanese companies.

"The uncertainty over what is going to happen over the next few months seems to be hurting sentiment," Societe Generale's Mr Okubo added.

Yen factor

The uncertainty surrounding the global economic outlook has also has a big impact on the Japanese currency. Investors have been flocking to the yen, considered as a safe-haven asset in times of economic turmoil.

That has seen the Japanese currency strengthen by as much as 8% against the US dollar in the past 12 months.

It does not bode well for the Japan's export-dependent manufacturers. A strong yen not only makes their goods more expensive but also hurts profits of companies when they repatriate their foreign earnings back home.

"If you look carefully, you can see the heavy burden of a higher yen, and their profits are under pressure," said Hideo Kumano of Daiichi Life Research Institute.

According to the Tankan survey, large manufacturers said they based their business plans on the yen averaging 81.15 against the US dollar for the current financial year. It was trading close to 77 yen against the US dollar in Asia trade on Monday.

The Japanese authorities have already intervened in the currency markets this year. Last week, the Finance Ministry said it was ready to act again and could spend another 15tn yen ($196bn; £125bn) to stabilise the currency.

Source: www.bbc.co.uk

No comments:

Post a Comment