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Japan's Business Sentiment Rebound Shows Market `Disconnect': Chart of Day

Confidence among managers of small Japanese businesses is close to the highest since 2007 even as stocks tumble, highlighting a “disconnect” that supports the nation’s economic recovery, according to Capital Economics Ltd.

The CHART OF THE DAY shows sentiment at small companies hovered near the highest level since November 2007 this month, even as the Nikkei 225 Stock Average touched the lowest level since November on concern that Europe’s sovereign debt crisis will derail the global economic revival.

“The continued rebound of small business confidence in Japan is a good example of the disconnect that sometimes happens between the worries of financial markets and reality on the ground,” Julian Jessop, the London-based chief international economist at Capital Economics, said in a report this week. “There is little doubt that the recovery still has plenty of momentum.”

Sentiment at small firms in Japan helps signal prospects for the economy because they employ about 70 percent of the workforce. Corporate bankruptcies fell in each of the past nine months as credit became more accessible and demand picked up in the wake of the country’s worst postwar recession.

The index of small business sentiment was at 46.7 in May, and respondents forecast an increase to 47.9 in June, according to Shoko Chukin Bank’s survey of 1,000 companies that was conducted this month and released on May 26. If realized, that would exceed the average monthly reading over the past 25 years.

Jessop singled out improvements in gauges of employment and financial conditions, saying “fears about the availability of credit are overdone, at least in Japan.” While the survey has yet to reflect the full impact of the turmoil stemming from Europe, “we expect that fallout to be small,” he wrote.

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To contact the reporter on this story: Minh Bui in Tokyo at mbui@bloomberg.net

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