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Japan Tankan Sentiment Worsens as Slowdown Hurts Exports

Big Japanese manufacturers became more pessimistic as slowdowns in China and Europe sapped export demand and pushed the nation closer to an economic contraction.

The quarterly Tankan index for large manufacturers fell in September to minus 3 from minus 1, the fourth negative reading, the Bank of Japan said today in Tokyo. The median estimate of 18 economists surveyed by Bloomberg News was for minus 4. A negative figure means pessimists outnumber optimists.

Today’s report follows data last week showing a second monthly decline in industrial production in August, and JPMorgan Securities and Credit Suisse Group AG said that Japan’s economy probably shrank in the third quarter. With consumer prices still falling, the BOJ may be forced to add stimulus again this month as it remains distant from its 1 percent inflation target.

“Japan’s economy will probably have two consecutive quarters of contraction in the July-September and October- December periods,” said Kiichi Murashima, chief economist at Citigroup Global Markets Japan Inc. “Exports are the main reason for the economic contraction.”

Shipments have fallen for three months, slipping 22.9 percent in August to the European Union and 9.9 percent to China. “Economic conditions in Japan’s main export markets are very unstable,” Finance Minister Jun Azumi said on Sept. 28.

Regional Tensions

Growth is further threatened by a spat between Japan and China over islands claimed by both nations in the East China Sea. The crisis is hurting the $340 billion trade relationship between Asia’s two largest economies, causing cancellations of 40,000 seats on All Nippon Airways (9202) flights, while Toyota Motor Corp. (7203) and Nissan Motor Co. (7201) are cutting production in China.

China’s economy is poised for its weakest annual expansion in 22 years. The 17-nation euro economy is on the brink of recession after contracting 0.2 percent in the second quarter. Economic confidence in the euro area unexpectedly fell last month as leaders tried to rein in the debt crisis.

Large manufacturers will probably stay pessimistic in this quarter, today’s report showed, with the outlook index for December also at minus 3. Japan’s industrial production is expected to slide again in September, the government said last week.

Automakers Pressured

The sentiment index for automakers fell to 19 in September from 32 in June, the Tankan survey showed, as government car subsidies run out and anti-Japan sentiment flares up in China. The outlook index for December was seen falling to minus 5.

“Companies are becoming more concerned about the outlook for the economy and their businesses,” said Yoshimasa Maruyama, chief economist at Itochu Corp. in Tokyo. “Some of them may start to consider postponing planned business investment for this fiscal year.”

The Bank of Japan on Sept. 19 followed the government in downgrading its assessment of the domestic economy, saying growth has “come to a pause.” The economy expanded an annualized 0.1 percent in the quarter through September, according to a median forecast of economists surveyed by Bloomberg News. Morgan Stanley & Co. and Citigroup Inc. expect the economy to contract in the two quarters through December.

Strong Yen

The yen was trading at 77.93 per dollar at 10:54 a.m. in Tokyo, less than 4 percent from last year’s postwar high of 75.35 per dollar. The strong yen makes exports more expensive and reduces the value of repatriated earnings. Sony Corp. (6758), Japan’s largest electronics exporter, cut its annual profit forecast 33 percent in August, and was downgraded by Standard & Poor’s last month to two levels above junk.

Large manufacturers forecast on average that the yen will trade at 79.06 per dollar in the year through March 2013, according to today’s report.

Japan’s core consumer prices fell 0.3 percent in August from a year earlier, a report last week showed, matching the steepest decline in 16 months. That compares with a Bank of Japan forecast for a 0.2 percent increase in prices in the fiscal year that started in April and a 0.7 percent gain in the following 12 months.

BOJ Easing

Lawmakers such as Shinzo Abe, a former prime minister who was elected as leader of the main opposition Liberal Democratic Party last week, are pushing for the BOJ to increase stimulus after it unexpectedly added 10 trillion yen ($128 billion) to its asset-purchase program last month.

Political gridlock also threatens to curtail the government’s ability to apply fiscal stimulus. The government could hit a spending ceiling after opposition parties in August did not approve legislation that enables the issuance of 38.3 trillion yen of deficit financing bonds.

Large companies plan to increase capital spending 6.4 percent this fiscal year, today’s Tankan showed, up by 0.2 of a percentage point from the June survey.

The Tankan confidence index for large non-manufacturers was at 8 in September, with the outlook index seen at 5 in December. Small manufacturers and non-manufacturers are also expected to become more pessimistic in December, the report showed.

The BOJ surveyed 10,722 companies from Aug. 28 to Sept. 28, with a 99.1 percent response rate.

To contact the reporters on this story: Andy Sharp in Tokyo at asharp5@bloomberg.net; Keiko Ujikane in Tokyo at kujikane@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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