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Japan's Q2 Tankan to show further drop in business confidence on profit woes
TOKYO (Thomson Financial) - The Bank of Japan's Tankan survey due out on Tuesday is expected to underscore a further decline in business confidence in the second quarter, due to mounting worries over profits stemming from rising energy and basic material costs and slowing domestic demand. Corporate Japan is also expected to scale back profit projections, which forms a key element in assessing the direction of capital investments, thereby showing greater downside risks to the corporate sector which has supported the longest economic recovery in the post-World War II period. However, the gloomy Tankan survey is not likely to prompt the Bank of Japan to consider shifting its monetary policy towards a credit easing, as inflationary risks gain momentum across the globe. 'As declines of profits are now gaining momentum, stemming from a slowdown in overseas economies led by the U.S. economy, and surging energy and material costs, a steep deterioration of business sentiment is likely to continue,' Mitsubishi UFJ Securities senior economist Tatsushi Shikano said. The Tankan polls more than 10,000 companies across a range of industries and paints a detailed picture of how they see business conditions over a three to six month period. The results are expressed in diffusion indexes (DI), with positive numbers indicating that bullish opinions outnumber bearish ones. Ten economists polled by Thomson Financial expect the headline index of business confidence among big manufacturers to have fallen to 4 on average from 11 in the March poll. Estimates for March range from minus 2 to plus 7. If the June DI hits a negative figure, it will be the first since the June survey in 2003 when the sentiment DI stood at minus 5. A recent corporate sentiment survey by the Ministry of Finance already signalled a poor outcome for the Tankan report, showing the business sentiment diffusion index for large companies dropped to minus 15.2 in the second quarter, or its lowest since the government began compiling the data in its present form in 2004. The same survey also showed growing downside risks to profits, with respondents now expecting a 2.0 percent decline in the combined pretax profit before extraordinary items in the fiscal year ending March 2009. In the previous survey, respondents were expecting a 6.0 percent rise in pretax profit. 'Reflecting a slowdown in overseas economies, the sentiment DI of the general machinery sector as well as that of metal processing and precision machinery sector is likely to fall most notably,' Mitsubishi UFJ's Shikano said. Mitsubishi UFJ forecast the sentiment DI of large manufacturers will decline to plus 5 in the June survey. 'Looking further ahead, given lingering concerns about a recession in the United States stemming from renewed anxiety about the credit crunch, and fears about unabated rises of crude oil prices, corporate Japan is likely to present a cautious outlook in the September poll,' Shikano said. Mitsubishi UFJ Securities expects a further decline in the headline index to 2 in the September survey. Meanwhile, confidence among big non-manufacturers is expected to drop to 8 in June from 12 in the March poll, with the forecasts ranging from 5 to 10. The category includes services companies, retailers and wholesalers, among others. 'The confidence of retail, as well as the restaurant and hotel service sectors is likely to fall due to sluggish consumer spending and surging costs, while sentiment in the construction and real estate sectors is also likely to drop due to higher construction costs and funding costs,' Mizuho Research Institute senior economist Hirotaka Kusaba said. The government said recently that the consumer confidence index fell to 33.9 in May, its lowest level since December 2001, due to worries about deteriorating economic conditions, the labour market and inflation. The same data showed that a record 87.1 percent of those surveyed expected prices to rise over the next 12 months. According to a monthly survey by the Oil Information Center, the average price of regular-grade or low-octane gasoline stood at a record 173 yen as of June 10. Mizuho Research forecast a fall in the sentiment index for large non-manufacturers to plus 9 in the June poll, but to stay at that level in the September survey. Economists are also expecting a worsening of sentiment in the June quarter among smaller companies, which employ most of Japan's workforce, due to growing profit concerns stemming from sluggish domestic demand and higher purchasing costs. The sentiment diffusion index for small manufacturers is expected to come in at minus 13 from minus 6 in March, while the index of business confidence among small non-manufacturers is expected at minus 22 from minus 15 in the March survey. 'Small-sized companies that face difficulties in raising delivery prices due to concerns about the impact on sales, are feeling bigger downside risks to their profits than the leading companies, which will result in a bigger decline in sentiment,' said Rei Tsuruta, an economist at Mitsubishi UFJ Research & Consulting. Mitsubishi UFJ Research is expecting the diffusion index for small manufacturers to hit minus 15 and the index for small non-manufacturers to hit minus 23. Profit downgrades Given higher procurement costs and slowing export demand, economists are expecting corporate Japan to revise down profit forecasts. In the March Tankan survey, all industries, including small-, mid-, and large-sized companies projected a combined 2.4 percent rise in pretax profits before extraordinary items for the year to March 2009. At the time, small-sized companies forecast a 7.9 percent rise in the aggregate pretax profits and large-sized companies projected a 0.3 percent gain in pretax profits. 'As surging energy and material costs are squeezing profit margins, and as demand at home and abroad is slowing down, the combined pretax profit may fall at a double-digit pace in the fiscal year to March 2009,' Mizuho Research Institute senior economist Yasuo Yamamoto said. Faced with stronger downside risk to profits, corporate Japan may make a smaller upward revision than normal to capital investment plans for the current fiscal year. In the March poll, the combined capital investment at all industries was forecast to fall 5.3 percent in the year to March 2009, while the aggregate capital investment at large-sized companies was projected to dip 1.6 percent. In 2007, between the March survey and the June survey, corporate Japan revised their capital investment plans for the year to March 2008 to reflect an annual rise of 3.1 percent from the previous forecast of a 0.3 percent decline. The market is also keen to see the latest Tankan sub-indexes on production capacity, as well as the sub-indexes on labour, in order to get a glimpse of the future trend in prices and their implication for interest rates. The labour sub-index, which counts the number of companies that believe they have too many employees and subtracts those that believe they have too few, stood at minus 9 in March compared with minus 10 in the December poll, indicating companies felt there was a labour shortage and could increase hiring. In the March poll, the production capacity sub-index, which counts the number of companies that believe they have too much production capacity, and subtracts those that believe they have too little, stood at zero. 'While the Japanese economy is now on the verge of ending the prolonged economic recovery and falling into a recession, as long as corporate Japan is not saddled with excess labour or production capacities, any recessionary move will be mild and short-lived,' Mizuho's Yamamoto said. 'And if so, the Bank of Japan can stay away from being forced to lower interest rates, even if the Japanese economy were to slip into a recession,' he said. The Bank of Japan will hold its next policy board meeting from July 14 to 15. ($1 = 106.96 yen) [email][email protected][/email] -- by Yasuhiko Seki -- yas/ng/ng COPYRIGHT Copyright Thomson Financial News Limited 2008. All rights reserved. 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