Tokyo, June 27 (BridgeNews) - Japanese corporate sentiment continued to deteriorate in June, reflecting a declining stock market and weakness in exports and industrial production as the global economy slows down. The BridgeNews "tankan" survey of company planners suggests that the diffusion indexes in the Bank of Japan's own quarterly survey, to be released on Monday, will continue to decline from March.
The BridgeNews "tankan" survey showed that the diffusion index (DI), or net percentage of firms that see business conditions as favorable, fell to -28 in June from -12 in March and -24 in May for major manufacturers. The DI for non-manufacturers fell to -9 from -8 in March, and was unchanged from May. The poll showed that the DIs for both major manufacturers and non-manufacturers are likely to improve to -13 and -5, respectively, in the next three months.
In the BOJ's tankan for March, the DI for major manufacturers worsened to -5 from +10 in December, while the index for major non-manufacturers was at -13 compared to -10 in December. Weakness in the stock market during the survey period of June 8-22 probably caused corporate planners to be more pessimistic about business conditions. The Nikkei 225 Stock Average traded below the critical 13,000-point level for much of the survey period, after data showed that the economy contracted in the first quarter.
Real gross domestic product for January-March declined 0.2% on quarter, or an annualized 0.8%. GDP for iscal 2000-01 rose 0.9%, falling short of the government's forecast of 1.2% growth. Capital spending also declined 1.0% on quarter--the first drop since April-June 2000--indicating that capital expenditure may have already peaked. To make matters worse there is little sign of recovery in overseas demand, which has weighed on production.
Industrial output dropped 2.0% on month in April, following a 3.7% on-quarter decline in January-March, the first fall in seven quarters. And April-June production is also expected to show a relatively sharp decline. Although manufacturers are cutting production, their inventories continue to increase, and that will heighten downward pressure on output. The index for inventories of industrial goods stood at 100.3 in May, the highest level since November 1998, when the index was at 101.5, according to the Ministry of Economy, Trade and Industry (METI). In addition, exports declined 9.9% on year in May, the fifth consecutive month of decline on a volume basis.
Moreover, the Council on Economic and Fiscal Policy (CEFP) led by prime minister Junichiro Koizumi unveiled on June 21 its mid-term economic guideline. The plan includes steps to eliminate bad loans from banks' balance sheets in two-three years, and caps the new issuance of government bonds at 30 trillion yen in fiscal 2002-03.
While the steps are welcome, corporate planners are concerned about the pain that the nation will experience as it carries out structural reform. Heizo Takenaka, minister of state for economic and fiscal policy, estimated that a further 100,000-200,000 people will lose their jobs as the result of economic reform. He also forecast that Japan's economic growth will be 0-1% for the next two or three years.
THE SURVEY
Beginning with the May survey BridgeNews revised the weighting of industries to more accurately reflect the BOJ's tankan. Electric machinery firms now account for about 22% of major manufacturers in the Bridge tankan, up from 10%. The industry accounts for about 21% of major manufacturers in the BOJ's major firms' Tankan.
The survey group now comprises 200 manufacturers and 200 non-manufacturers, versus the 391 corporate planners--213 manufacturers and 178 non-manufacturers--BridgeNews surveyed from June 1998 to April 2001. During the latest survey period 260 firms responded. Between March 1996 and April 2000, BridgeNews also surveyed a smaller group of 191 major Japanese firms with capital of 1 billion yen or more about business conditions.
Since June, BridgeNews has surveyed 200 firms--100 manufacturers and 100 non-manufacturers. In the June survey, 141 companies responded.