Tankan Shows Pause in Japan Economy

Reviewed by Hitoshi URABE

Article:
Tankan Shows Pause in Japan Economy
(Yoko Nishikawa) Reuters
http://today.reuters.com/investing/financeArticle.aspx?type=economicNews&storyID=2006-04-03T073836Z_01_T179720_RTRIDST_0_ECONOMY-JAPAN-UPDATE-4.XML

Comments:

Tankan, an abbreviation of contracted form of "Short-term Economic Survey of Enterprises in Japan" in Japanese is a quarterly report compiled by the Bank of Japan. Tankan is one of the most closely watched economic surveys for a number of reasons. It is a summary of replies by over 10,000 private corporations. It is publicized with a very short time lag, and the numbers in the report are very easy to comprehend. Most of the key numbers (diffusion index) are calculated by simple subtractions where the numbers of companies who feel the economy is bad is subtracted from those who feel it is good, and indicated on the base denominator of 100.

The numbers reported by BOJ on Monday, 3rd showed a continued confidence of Japan's business sector and recovery of economy. The closely watched figure, the diffusion index (DI) of confidence among large manufacturers, showed 20, slipping 1 point from the December survey, marking the first decline in four quarters.

This drop initially caused a small confusion among the watchers as the number was expected to go further up, to the range of 23 or so. It seems that a number of large corporations, such as those belonging to textile and paper-pulp sectors, became somewhat cautious in the anticipation of higher prices of crude oil and other raw materials. In contrast, the electrical machinery sector as well as the automobile sector showed strong gains. Meanwhile, the DI for major nonmanufacturers climbed 1 point to 18 in March, the highest level since February 1992.

It is important to note that the large manufacturers' DI level of 20 being sustained for more than a year last occurred a decade and a half ago, amid the bubble. Indeed, other figures generally came out strong.

Major firms' investment plans showed increase capital expenditure by 2.7% on average in the current fiscal year. The DI for employment conditions at big companies in all industries, calculated by subtracting those reporting a shortage of labor from those having an excess, registered minus 6, compared with minus 2 in the last report of December. This indicates more companies than in the previous poll are experiencing a labor shortage, raising hopes that employment conditions will improve. The DI covering production facilities showed minus 1 for large corporations, which indicates a shortage of factories and equipment. In fact, the figure became negative for the first time since November 1991.

There are concerns, however. Corporate managers explain they have not yet seen strong demands by the consumers, which makes it difficult to pass on the rising prices of raw materials. Also, many are afraid that the rising share prices and bullish business sentiment might prompt the central bank to raise short-term interest rates earlier than initially expected. But for the time being, Japan's economy seems to be clearly back on track.