TOKYO (AFX-ASIA) - The Bank of Japan's March Tankan survey indicates a faster than expected deterioration in business sentiment, and companies' hopes of a recovery in the second half of the current fiscal year are over-optimistic, economists said.
They said the corporate forecasts in the March survey may be downgraded sharply in the next Tankan in June as the reality of the slowdown bites.
The significance of the survey for monetary policy is limited as the central bank has already done all it can to ease liquidity, although generally the Tankan is seen as negative for the yen, they added.
In the latest March survey, the large manufacturers' diffusion index came in at minus five, while non-manufacturers was minus 13, with large firms' year to March 2002 capital expenditure seen down 4.7 pct.
The consensus forecast of economists for the large manufacturers' DI was plus one, with the large non-manufacturers' DI seen at minus 13 and large firms' capex for the year to March 2002 seen falling 4.0 pct.
In the December Tankan survey, the large manufacturers' diffusion index came in at plus 10, while the large non-manufacturers' DI was minus 10.
Commerzbank Securities chief economist Ron Bevacqua said the survey was worse than consensus although "not outside the realms of expectation," while it suggests manufacturers expect a rebound in the second half of the year to March 2002, on a recovery in the U.S. "The (DIs) are still falling but the rate of decline is slowing.
That's consistent with the capex of manufacturers becoming positive. In unemployment, there's no increase in what they perceive to be excess workers," he said.
However, "the recovery is driven almost entirely by exports and that worries me," Bevacqua said, adding that the survey suggests companies may be a little complacent about the likelihood of a U.S. second half recovery.
JP Morgan senior economist James Malcolm said the survey suggests large firms are being overly optimistic about the likelihood of a rebound in the second half.
"In terms of sentiment, it is not much of a surprise but I think business plans in terms of profit projections, sales and capex are a little bit too optimistic" for large manufacturers, Malcolm said.
"They are based on the expectation of a strong rebound in the second half, with a pick up in exports, that would mean a very optimistic scenario for external demand," he said.
"In downturns, firms tend to be more optimistic -- it is the first Tankan of the year, it is more like firms' targets than real projections," Malcolm said.
"I expect a second Tankan with strong downward revisions in terms of business plans, for profits, and little improvement for capex and sales," he said.
"We think that (the downturn) is likely to be more prolonged than one or two quarters, it depends a lot on the U.S. We expect a sharper slowdown than in 1995 but less than in 1997-98," he said.
Morgan Stanley Dean Witter strategist Noboru Kawai noted the sharp discrepancy between the market's perception of business conditions and that of corporates shown in the Tankan survey.
"Business sentiment is deteriorating faster than my expectations. I expect it will not slow down even after this summer," Kawai said. "We have to monitor the situation more carefully."
However, he added that the Tankan's corporate indicators for the second half of the fiscal year suggest businesses expect the slump will be over quickly, with "a sharp rebound in profitability ... expected". "Individual judgmental indicators such as those related to capital investment, employment and even profits, are relatively more steady or even aggressive in some cases," he noted.
"Manufacturers in particular appear to be feeling comfortable with their existing approach to capital spending," he said.
"Although I do not think the market is impressed by corporate expectations of a swift turnaround in the fiscal second half, (it) may consider this sort of U-turn as a meaningful risk factor," Kawai said.
Industrial Bank of Japan economist Atsuo Tominaga said large industrial firms may be forced to downgrade year to March 2002 capital investment plans further unless global information-technology demand picks up again.
"Their investment plans, depending on developments in offshore demand, may face downside risk, although under normal circumstances their plans have a tendency to be upgraded as time passes," he said.
"What is worrying, however, is their reaction to the yen's fall of late," he added.
"The latest survey may mean that the yen's fall, due to the growing business correlation between Japanese and Asian firms, no longer positively supports the activity of Japanese firms," Tominaga said. The sentiment DI for electronics makers, primary beneficiaries of a weaker yen, fell to minus 9 in the March Tankan from plus 30 in the December report, with this DI seen deteriorating further to minus 11 in the June report. BNP Paribas economist Naoki Murakami's views were more in line with those of industry, forecasting a partial recovery in the second half as the U.S. economy begins to improve.
"The only recovery factors are external. We assume the U.S. economy will pick up from the second half, which will help Japan. Growth will be led by exports," Murakami said, although this will see further weakening of the yen.
"This Tankan will have an impact on the yen. We assume the rate will reach around 130 yen (to the dollar) ... and average 125 yen for 2001," Murakami said.
However, Sanwa Research Institute senior economist Tatsushi Shikano said the decline in the yen may not be enough to help firms out.
"The ongoing fall in the value of the yen may not be able to fully compensate for the downward pressure on corporate earnings from the decline in the U.S. economy," he said, with further pressure on investment plans seen.