Japan Manufacturer Confidence Deteriorates First Time Since End of Crisis

Confidence among Japan’s largest manufacturers worsened for the first time since the end of the financial crisis last year after a stronger yen eroded export gains and the effect of government stimulus measures faded.

The quarterly Tankan index of sentiment at large manufacturers dropped to 5 in December from 8 in September, the Bank of Japan said in Tokyo. A positive number means optimists outnumber pessimists. Sentiment is expected to fall to minus 2 in March, and companies submitted the strongest forecast for the yen since data began in 1996, the data also showed.

Today’s report adds to concern that Japan’s economy may contract in the fourth quarter, and buttresses the case for the Bank of Japan to consider more monetary stimulus. Data for October showed industrial output fell by the most since February 2009, export growth moderated and the jobless rate rose.

“Japan’s economy will stay at a standstill until the end of the fiscal year” in March, said Yuichi Kodama, an economist at Meiji Yasuda Life Insurance Co., Japan’s third-biggest life insurer. “A trigger for the BOJ to ease further” would be an appreciation of the yen past 80 per dollar, he said.

The median estimate of 20 economists surveyed by Bloomberg News was for a reading of 3. The deterioration in the confidence reading was the first since March 2009. The financial crisis faded in the second quarter of 2009 as banks recapitalized.

Stocks, Yen

Japanese stocks were little changed after the report, having risen this month on signs of stronger U.S. growth that’s also boosted the dollar against the yen. The Nikkei 225 Stock Average rose 0.1 percent to 10,325.89 as of 10:40 a.m.

The yen fell 0.3 percent to 83.93 per dollar, leaving its gain for the year to date at 11 percent, the biggest among Group of 10 currencies. Large manufacturers expect the yen to trade at an average of 86.47 per dollar in the year through March, the highest level since the Tankan survey included the yen-forecast question in 1996, compared with the 89.66 predicted in September.

Fumio Ohtsubo, president of Panasonic Corp., the world’s largest maker of plasma televisions, said last week that the yen’s appreciation is making it tougher for the company to compete with its South Korean rivals, such as Samsung Electronics Co. The Korean won has risen 1.1 percent against the dollar this year, and fallen about 9 percent versus the yen.

“When you look at the value of yen and the won against the dollar, the yen has been gaining and the won has been declining,” Ohtsubo said. “That makes it very difficult for us to compete with South Korean makers in the U.S. or in Europe.”

Korean Competitiveness

South Korea’s unemployment rate unexpectedly fell to a six- month low of 3.2 percent in November as the nation’s economic expansion encouraged manufacturers to hire more workers, Statistics Korea said in Gwacheon today. By contrast, Japan’s jobless rate rose to 5.1 percent in October.

Japan’s gross domestic product is expected to shrink at a 1.9 percent annual pace in the three months through December, according to a survey of 42 economists released Dec. 8 by the Economic Planning Association. Growth was 4.5 percent in the third quarter as incentives to buy cars and electronics spurred consumer spending.

The government’s subsidy program to buy fuel-efficient cars ended in September, prompting companies including Toyota Motor Corp. to reduce production in October.

Stimulus Fades

“Companies will likely stay cautious about the outlook for business conditions as it’s hard to gauge the level of domestic demand following the end of stimulus programs,” BNP’s Kono said.

The yen’s advance against the dollar may also cloud the outlook, economists said, even while the currency has retreated from the 15-year high set in November. Rohto Pharmaceutical Co. said last month that it cut its full-year profit forecast 7.4 percent, citing the strong yen.

“The yen is still staying at a high level, so it will likely weigh on manufacturer sentiment,” said Mitsumaru Kumagai, chief economist at Daiwa Institute of Research in Tokyo. The yen’s appreciation against the euro amid concern about Ireland’s fiscal woes is also weighing on sentiment, he said.

The Japanese parliament last month passed an extra budget to fund a stimulus package aimed at fighting deflation and combating the stronger yen. To foster growth, the Bank of Japan cut its benchmark interest rate and created a 5 trillion yen fund to buy bonds and assets, including real-estate investment trusts and exchange-traded funds. It said yesterday it will start buying the ETFs and Reits as soon as today.

‘Minority’ View

Given the recent gains in stocks and declines in the yen, “those expecting the BOJ to approve further easing measures at the next meeting are now in the minority,” said Naoki Iizuka, a senior economist at Mizuho Securities Co. in Tokyo. Still, “if the Tankan or other indicators show a clear deterioration, it would open up the possibility of additional monetary easing.”

The central bank’s policy board is meeting on Dec. 20-Dec. 21 in their final meeting for 2010.

Still, stocks have risen this quarter and the yen has retreated from a 15-year high against the dollar amid optimism the Federal Reserve’s quantitative easing may help the global recovery, boding well for Japan’s economy, said Susumu Kato at Credit Agricole CIB and CLSA.

Large companies plan to boost spending by 2.9 percent in the year ending March 31, more than the 2.4 percent planned three months ago. Economists forecast a 2.7 percent increase.

“The U.S. economy is showing signs of picking up and emerging nations have maintained robust growth,” said Kato, chief economist for Japan in Tokyo. “There will be no need to worry too much about the outlook for business and corporate earnings.”

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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