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Markets brace for slump in Japanese business confidence PDF Print E-mail
Tuesday, 01 April 2008

A key survey of corporate Japan is expected to show that business confidence has plunged to a four-year low on worries about high oil prices, a stronger yen and a weak US economy, analysts predict, reports AFP.

The Bank of Japan’s closely watched “Tankan” report, due out Tuesday, is likely to show companies are scaling back their profit forecasts and investment plans as a result of the tougher operating environment, they said.

“The deterioration of the profit environment, stemming from a slowdown in overseas economies and surging crude oil prices, as well as the appreciation of the yen, have dealt a huge blow to corporate sentiment,” Mitsubishi UFJ Securities senior economist Tatsushi Shikano said.

“Reflecting a slowdown in overseas economies, some companies now face the need to reduce production to deal with unexpected rises in inventories,” Shikano said. Economists, on average, predict the headline index of confidence among major manufacturers slumped to 12 in March from 19 in the December Tankan survey of more than 10,000 companies, according to a survey by the Nikkei business daily.

That would be the lowest level since March 2004. Confidence has already fallen from a two-year high of 25 seen in December 2006 but it is still much higher than a low of minus 38 struck six years ago. Sentiment among big non-manufacturers is expected to have deteriorated to a reading of seven from 16 in the December poll.

The indices represent the percentage of firms experiencing favourable business conditions minus the percentage of those seeing unfavourable conditions. Japan’s corporate sector has been a key driver of the recovery in the world’s second largest economy after a decade- long slump.

Helped by a weak yen, companies have racked up record profits in recent years that allowed them to invest heavily in new equipment and factories. But many firms are now looking to scale down capital spending to cope with an expected drop in earnings. In mid-March, the dollar fell to a 12-year low of 96 yen, far below the level companies had been preparing for at the time of the December Tankan.

Economists are also expecting a worsening of sentiment in the March quarter among smaller companies, which employ most of Japan’s workforce, due to growing profit concerns and sluggish domestic demand. Japan’s economy is on the mend after a slump stretching back over a decade, but sluggish consumer spending has raised concern that the country’s export-led recovery is vulnerable to a global economic slowdown.

Although core inflation hit a decade high of 1.0 percent in February, Japan’s central bank is seen as unlikely to raise its super-low interest rates from 0.5 percent any time soon, with some analysts even predicting a rate cut. Goldman Sachs Securities chief economist Tetsufumi Yamakawa is predicting a rate cut by the Bank of Japan at one of its two meetings in April.

“The Tankan is likely to show an accelerated decline in sentiment across the broad front, forcing the BoJ to revise its economic view and scenario, which is already distant from the perception shared by the market,” Yamakawa said.

The BoJ raised interest rates in 2006 for the first time in almost six years. It hiked rates again in February last year but has held them steady since then amid domestic political uncertainty and financial market turmoil.

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