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Japan Tankan Signals Concern Confidence Will Keep Sliding

Japan’s large manufacturers expect business confidence to slump in coming months after the nation’s strongest earthquake on record devastated the northeast region on March 11.

The quarterly outlook index of sentiment among big manufacturers is seen falling to minus 2 in June from 6 in March, which would be the lowest reading in a year, according to a breakdown of the Bank of Japan’s Tankan survey released in today. A negative number means pessimists outnumber optimists.

The report underscores the blow to corporate sentiment as damage to factories and power shortages limit production and Tokyo Electric Power Co. struggles to stem radiation leaks at a crippled nuclear plant. At the same time, the projected deterioration in confidence wouldn’t be as bad as during the financial crisis, when the measure plunged to a record low of minus 58.

“The report doesn’t reflect how truly bad corporate sentiment is,” said Naoki Iizuka, a senior economist at Mizuho Securities Co. in Tokyo. “We’ll see considerable contractions in gross domestic product in the first quarter and second quarter, so sentiment will likely be bad for some time.”

The yen traded at 84.17 per dollar as of 11:12 a.m. in Tokyo. The Nikkei 225 (NKY) Stock Average rose 0.7 percent to 9,778.28.

Global Financial Crisis

Large manufacturers’ business confidence fell to 6 in the March 12 to 31 period from 7 from Feb. 24 to March 11, the central bank said in Tokyo. It cautioned that the figures weren’t robust because only 2,618 responded after the disaster compared with 7,998 before. Previously released numbers showed the figure was 6 through March 31, from 5 in December.

Sentiment during the global financial crisis fell to the lowest level since the survey began in 1974. Economists at Nomura Securities Co. and RBS Securities Japan Ltd. forecast GDP will contract this quarter, though not at the record pace it shrank in 2009.

“In terms of GDP, it won’t be as bad” as after Lehman Brothers Holdings Inc. collapsed, said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. “That was a global recession, but this time overseas economies are expanding and we’ll start to see some reconstruction demand in coming months.”

Car Sales Plunge

Data so far for March have shown that manufacturing fell at the fastest pace in at least nine years, while new car sales in Japan decreased 37 percent, the biggest drop for the month ever. The earthquake and tsunami crippled Tokyo Electric Power Co.’s Fukushima Dai-Ichi atomic plant, causing the world’s worst nuclear crisis since Chernobyl in 1986.

Companies from Honda Motor Co. and Sony Corp. have halted production after the disaster.

Toyota Motor Corp., the world’s largest automaker, has said it lost 140,000 units of production from March 14 to March 26, citing a shortage of electronic parts, rubber and plastics. Scarce parts and electricity may prompt it to delay making at least 500,000 vehicles in Japan, according to Koji Endo, an auto analyst at Advanced Research Japan. Honda Motor Co. has seen a production loss of 46,600 cars and trucks and 5,000 motorcycles.

Signs of Resilience

March reports have overshadowed February data that showed industrial production rose for a fourth month and the unemployment rate dropped to a two-year low, data that indicated the economy’s resilience would cushion the effect of the natural disaster this quarter.

“Given the earthquake, the economy will likely contract both in the first quarter and the second quarter, putting off an escape from the economic lull,” Takahide Kiuchi, chief economist at Nomura in Tokyo, said before the report. “The BOJ may expand the size of its asset purchase program” this month.

The disaster, which has claimed more than 11,000 lives, has also caused a plunge in Japanese stocks and sent the yen to a post-World War II high against the dollar, prompting the first coordinated currency intervention by Group of Seven nations in more than a decade.

Damage Estimate

Damage from the quake and tsunami is estimated by the government to swell to as much as 25 trillion yen ($297 billion). Prime Minister Naoto Kan is preparing an extra budget to pay for reconstruction efforts.

The BOJ doubled its asset-purchase program to 10 trillion yen on March 14, increasing the funds injections into the financial system. Nomura’s Kiuchi said the bank may increase the size of the asset buying program by between 3 trillion yen and 5 trillion yen at its meeting on April 28. The central bank will next meet on April 6-7.

The central bank is also considering offering temporary loans to banks to encourage lending to companies with cash-flow shortages in the wake of the quake, according to three people familiar with the matter.