TOKYO, Sept 25 - A key survey of Japanese companies on Wednesday was expected to show that most felt cautiously better about business prospects in the latest quarter, thanks to signs of a recovery in the U.S economy, strong demand for Japanese goods from China and higher share prices. A poll of 24 economists on the Bank of Japan's quarterly "tankan" corporate sentiment survey produced a median forecast of zero for the headline large manufacturers' diffusion index (DI), which would be the best reading in more than two years. The figure in the June tankan was minus five. The DI measures business sentiment by subtracting the percentage of companies reporting unfavourable conditions from the number that say they are favourable.
However the picture for the economy as a whole remains mixed. Although large firms may be more optimistic than three months before, smaller companies -- the backbone of Japanese industry -- are expected to remain worried, with economists forecasting that the diffusion index for small manufacturers would narrow only marginally to minus 26 from minus 28 in June. The survey will not reflect the yen's recent surge to three-year highs against the dollar, which threatens to cut profits at exporters and reduce demand for their goods. But analysts said the yen's rise may not have that much effect on the improving trend in the tankan survey. "It will be an adverse factor for exporters' profits," said Ryutaro Kono, chief economist at BNP Paribas. "But at current levels it is unlikely to put a stop to improvements in the DI," he said, noting that the DI had continued to improve in 1999 when the yen briefly reached 101 to the dollar, much higher than the current level of around 112. The overall slight improvement in sentiment follows a string of data in recent months showing that the Japanese economy is starting to pull out of its 10-year slump. The economy grew at its fastest clip in two-and-a-half years in the April-June quarter, with annualised growth of 3.9 percent, though most economists agree that such a rate is not sustainable. The coolest summer in a decade and the recent rise in the yen could slow growth in July-September, before it picks up again in the following three months.
The DI for large manufacturers will probably stand at three in the October-December quarter, which would be the first positive figure since the quarter ended December 2000, the poll found. Smaller manufacturers, however, more reliant on slower domestic demand and often not exporters, will still feel only slightly less pessimistic, with the index at minus 24 from minus 26 in the current period. The difference between the prospects for large and small companies was also clear in the estimates for capital spending in the year to March 2004, though both suggested an improvement. Economists in the poll saw large companies raising investment by some 5.7 percent over the previous year compared with a 9.5 percent cut by small firms. The June survey came up with figures of plus 4.9 percent and minus 13.0 percent respectively. "Company profits are improving and there are expectations for a recovery," said Hideki Matsumura, an analyst at Japan Research Institute, noting that this was pushing up investment in particular at large firms. "For non-manufacturers, the minus figures are narrowing under the influence of a recovery in personal consumption." For both large and small firms, non-manufacturers continued to feel pessimistic, though less so than three months ago. The index for large non-manufacturers stood at a median minus 11 compared to minus 13 in June, while for smaller counterparts it was a median minus 34 from minus 35, the poll found. The tankan will be released on Wednesday October 1 at 8:50 a.m. (2350 GMT Tuesday).//