Japan's most closely watched business barometer rose to its highest in 13 years in September but the outlook indicator for the coming months dimmed, underscoring concern that an economic recovery is losing steam. The Bank of Japan's "tankan" quarterly survey on Friday showed the key diffusion index (DI) for large manufacturers rose to plus 26 from plus 22 three months earlier, its highest since May 1991, and beating a consensus forecast of plus 23. Yet the DI -- derived by subtracting the percentage of companies downbeat about their business conditions from those that are upbeat -- for three months ahead was plus 21. "The index for September was better than expected, but the outlook index turned out to be more cautious than expected," said Yoshikiyo Shimamine, a senior economist at Dai-ichi Life Research Institute. "Concerns about a slowing in overseas economies and higher crude oil prices seem to be affecting the outlook." Earlier in the week, benchmark crude oil prices hit record highs above $50 a barrel and Tokyo share prices fell for a ninth consecutive session to hit six-week lows amid growing worries over signs of a slowing in the Chinese and U.S. economies -- the two main destinations for Japan's exports.
For now, though, financial markets on Friday took heart from the stronger-than-expected headline figure in the tankan, which covered 10,312 companies and is widely regarded as the most important business barometer for Japan. The yen rose about a quarter of one percent against the dollar immediately after the tankan figures were released, hitting one-week highs near 109.80 yen to the dollar . The data also boosted the Nikkei stock average <.N225>, which closed 1.33 percent higher at 10,967.49 at midday. The yield on the benchmark 10-year Japanese government bond (JGB) <0#JPTSY=JBTC> rose three basis points to 1.470 percent. "This is better than expected. Basic materials makers such as steel makers seem to be enjoying higher margins on their products," said Junichi Makino, a senior economist at Daiwa Institute of Research. Economics Minister Heizo Takenaka said after the data that the tankan confirmed the government's view that corporate activity is improving. "Although the result was stronger than expected by the markets, I am not particularly surprised," Takenaka told a news conference. "The result confirmed our view that the economy is recovering firmly and that corporate sector activity is improving," he said.
CAPEX UP, NON-MANUFACTURERS LAG
The tankan survey also showed that large firms upgraded their capital spending plans for the year ending next March, forecasting a 6.1 percent rise compared with a 5.7 percent increase they forecast in June. But an upward revision was expected, and the figure was below economists' forecasts for 6.3 percent growth. Adding to concern that Japan's economic recovery remains dependent on exports by its manufacturers, the tankan showed that improvement in sentiment among non-manufacturers still lagged. The September DI for large non-manufacturers rose to plus 11 from plus 9 in June, slightly below a consensus forecast for plus 13. The outlook DI for December was plus 10. It was the first time in 11 quarters that the outlook figure worsened. The index for small manufacturers rose to plus 5 in September from plus 2 in June, while that for small non-manufacturers inched up to minus 17 in September from minus 18. "The plus 26 reading for big manufacturers DI was stronger than the market's expectations but the December outlook DI is plus 21, down five points. The December DI is also one point below the June DI of 22," said Kazuhiko Sano, chief strategist at Nikko Citigroup. "Overall, it seems only the figures for big manufacturers were strong. I think this tankan marks the peak of business sentiment and is a positive for the bond market," he added. Bond prices rise when the economy weakens and interest rates decline. Earlier on Friday, the government said the nation's jobless rate eased to 4.8 percent in August from 4.9 percent in July. While that was well off a record 5.5 percent hit early last year, economists say the labour market remains weak and it is too early to expect personal consumption to take over from exports as the main driver of growth. Spending by salaried workers' households was down 0.2 percent from a year earlier in August in real terms, although it was up 3.6 percent from July, seasonally adjusted. Weak domestic demand means Japan's five-year-old deflation is likely to persist for some time, and figures on Friday showed that the core nationwide consumer price index (CPI), excluding prices of volatile fresh food, was down 0.2 percent from a year earlier in August and flat from the previous month.///