Japan corporate mood up despite yen worry

TOKYO (Reuters) - Japanese business confidence edged up in August and is expected to improve further in the coming months, underlining views that the world’s third-largest economy is rebounding from the shock of the March earthquake, a Reuters poll showed.

The monthly poll, which closely correlates with the Bank of Japan ‘s quarterly tankan survey, lends support to the view that the economy could achieve the highest growth among major industrial nations in the July-September quarter.

But fears of a global slowdown and a surging yen weigh on the outlook for exporters of cars and precision machinery, threatening to derail the export-led economy’s recovery after it was tipped into recession by the March disaster.

The Reuters Tankan survey for August showed the manufacturing sentiment index, derived by subtracting the percentage of pessimistic responses from optimistic ones, rose five points from July to plus 6.

That marked the fourth straight month of improvement since the quake, driven by sectors such as autos, precision machinery and chemicals.

The index is expected to improve further to plus 13 in November, close to levels seen just before it plunged by a record amount in April after the magnitude 9.0 earthquake and deadly tsunami that devastated the northeast coast and triggered a radiation crisis at the Fukushima Daiichi nuclear plant.

The index for non-manufacturers rose four points from July to plus 7, its highest level since December 2007, and is seen continuing to improve to plus 14 in the next three months.

The Reuters poll was taken from July 28 to Aug. 11, when debt crises in Europe and the United States triggered a global market upheaval and Japan intervened in the currency market and eased monetary policy to shield the economy from the impact of yen rises. It covered 400 big firms, of which 258 responded.

The Japanese currency has risen about 5 percent in just over a month amid broad dollar weakness to just shy of its record high of 76.25 yen to the dollar . The yen is also above levels major Japanese companies have been using in their earnings estimates.



Japanese auto executives have repeatedly warned that the yen has strengthened beyond what domestic exporters could cope with, and a top executive at Honda Motor Co said last week the firm is mulling ways to shift production overseas.

In the survey, manufacturers complained about the yen’s rise and voiced concerns over slowdowns in the United States and China, key destinations for Japanese cars and electronics.

“We feel the quake’s impact on production has been eradicated but we have not regained an appetite for capital spending as initially expected because of concerns about the yen’s persistent rise,” one precision machinery maker said.

An autos/transport equipment firm said: “Our earnings are deteriorating because of the yen’s rise, and new orders are unlikely to bring in much profit given oversupply and the strong yen.”

The sentiment index for the auto and precision machinery sectors jumped 29 and 24 points respectively in August, but the pace of gains is seen slowing to seven and eight more points each in November, reflecting the yen’s strength and an uncertain global outlook.

“Sales have increased but we don’t know if they will firm up,” said one textiles/paper company. “The economy, politics, nuclear power and reconstruction -- everything is unclear.”



Policy-makers and private-sector economists expect Japan ‘s economy to emerge from recession in July-September after three straight quarters of contraction, but there is growing uncertainty over global demand and reconstruction spending, with Prime Minister Naoto Kan expected to step down within weeks.

The BOJ’s tankan survey for April-June showed big manufacturers turning pessimistic about business conditions for the first time since the global financial crisis, though they expect improvement in the coming months. The next BOJ tankan is due on Oct. 3.