Japan’s Tankan index of business sentiments at 35-year low

Japan's key Tankan index of business sentiments among corporates for the quarter ended March hit a record low, the Bank of Japan, the country's central bank said today, indicating a drastic slowdown of businesses in the wake of the global crisis pushing the economy deeper into its worst post-war recession.

The Tankan index surveys corporate sentiment, measures the percentage of companies reporting a favourable business environment less those reporting unfavorable conditions. The central bank started compiling big manufacturers' business sentiment index in the quarterly survey in 1974 after the oil crisis.

The survey of large companies that think business conditions are good minus those that think they are bad, tumbled to minus 58 in March, the lowest number recorded in Tankan's 35-year history which is more than double the minus 24 of the previous quarter.

The plummeting confidence indicates lower consumer spending and investment, job losses, unemployment which is at a three-year high, exports dwindling to about half of last year and a deepening recession the world's second-largest economy is facing.

The quarterly Tankan survey of big manufacturers of automakers, steelmakers, electronics goods and other products fell at the fastest pace, lower than that of minus 57 recorded in 1975 when the economy was suffering from the Middle East oil crisis, demonstrating the extent of devastation caused by slumping global demand on export dependent Japan.

The auto sector index sentiment was the worst, recording a minus 92.

The index for major non-manufacturers' confidence also fell at a record pace to minus-31 from minus 9, the largest fall in 26 years, as increasing unemployment and falling salaries tighten consumer purse strings.

The Tuesday forecast by Organisation for Economic Cooperation and Development states that Japan's real economic growth rate would shrink by 6.6 per cent this year, far worse than Europe and the US, as big companies plan to cut their business investments, as well as payrolls.

The Tankan survey showed that the overall business trend remains gloomy with many companies cutting or planning to cut their business investments with collapsing demand leading to idle plants and worker lay offs, while smaller companies continue to face trouble mobilizing working capital as banks are unwilling to offer fresh loans for fear of default.

The central bank said it expects confidence among manufacturers to improve slightly, forecasting a rating of minus 51 for June and the index among non-manufacturers to rise 1 point to minus 30.

The survey also showed that major manufacturers expect a 62.7 per cent drop in pre-tax profits in the fiscal year 2008-09 and predict a 19.7 per cent slump for the fiscal year 2009-10.

Large manufacturers are expected to cut their capital spending by 13.2 per cent in fiscal year 2009-10, which is greater drop than 2.4 per cent, the previous year, a contrast to increase in corporate capital spending in the last few years.

Japan's economy shrank at an annualised pace of 12.1 per cent in the last quarter of 2008 and shrank 3.2 per cent in the fourth quarter, twice as fast as the U.S. and Euro zone economies.(See: Japan heading for worst recession since WW II: S&P )

Analysts expect Japan's economy to continue shrinking in the first half of this year which will be a record five quarters of decline.

The unemployment rate hit a three-year high of 4.4 per cent in February, while consumer spending fell 3.5 per cent month-to-month, said the government.

The industrial production declined for a fifth month in a row to a seasonally adjusted 68.7, down 9.4 per cent in February from the previous month, according to the Ministry of Economy, Trade and Industry. (See: Japan's trade nearly halves in February)

Prime Minister Taro Aso has plans for a new stimulus package by mid-April, fourth since October 2008, following the tankan survey to revive the economy.
Influential Japanese businessmen have been demanding for supplementary economic measures worth 30-trillion yen. (See: Japan Inc wants another 30-trillion yen economic measures)

The central bank board members review on the twice a year economic report scheduled on April 30, may consider cut Japan's growth forecasts and also expects to keep rates unchanged at 0.1 per cent.

Prime Minister Taro Aso, according to reports said the extra spending is expected to be around 10 trillion yen (101 billion dollars) with an aim to help generate two million new jobs over the next three years.

Analysts expect new spending to have limited effect in boosting the economy unless global demand for its goods pick up, which means than global economies should also improve, for Japan- an export reliant country to grow.