Japan's Tankan Sentiment Falls Less Than Estimated

By Jason Clenfield

July 1 (Bloomberg) -- Confidence among Japan's largest manufacturers fell less than economists estimated, signaling that the nation's exporters expect to withstand the U.S. slowdown and rising raw-materials costs.

The Tankan index of manufacturer sentiment slid to 5 points in June from 11 in March, a third quarterly decline, the Bank of Japan said today in Tokyo. The median estimate of 32 economists surveyed by Bloomberg was for a drop to 3 points.

Large companies said they plan to increase capital spending 2.4 percent this fiscal year, after saying they would cut investment three months ago. Exporters are turning to Asia and oil-producing nations amid waning sales in the U.S., the nation's largest market. That demand is easing the impact that record commodities costs have on corporate profits at home.

``Things are reasonably tough in terms of profitability but not so tough in terms of underlying demand,'' Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo, said before the report. ``In some ways, this is why people have been mistakenly pessimistic on the state of the economy.''

The yen traded at 106.09 per dollar at 9:08 a.m. in Tokyo from 106.15 before the report was published. The Nikkei 225 Stock Average rose 0.2 percent.

The large manufacturer index is still above the negative numbers recorded during Japan's most recent recession, which ended in 2002. The survey plunged to minus 51 in 1998, when Asia was in the throes of a currency crisis and the government had to buy failed lenders including Long-Term Credit Bank of Japan Ltd.

Komatsu's Profit

Companies are largely debt-free and cash-rich, Tetsuro Sugiura, chief economist at Mizuho Research Institute Ltd. in Tokyo, said before today's survey was released. Businesses have managed to control costs by trimming staff and keeping wages down. ``Companies are better prepared to handle external shocks than before,'' he said.

Komatsu Ltd., the world's second-largest maker of earthmovers, in April forecast its fifth year of record earnings, buoyed by demand for construction and mining equipment in markets from China and Russia to the Middle East.

Still, the U.S. slowdown is starting to spread to Europe and Asia, weakening Japan's export growth, while record energy and commodity prices are taking a toll on profits. Japan's economy probably contracted last quarter, as growth in overseas shipments slowed and households, whose budgets have also been squeezed by higher gas and food prices, tightened their belts.

Bank of Japan

Slower growth is likely to prevent the Bank of Japan from raising its key interest rate from 0.5 percent this year, even as inflation runs at the fastest pace in a decade, according to economists surveyed by Bloomberg News.

Crude oil prices have doubled in the past year, squeezing household budgets and the small businesses that employ more than 70 percent of Japan's workers. Consumer confidence slumped to a six-year low in May, household spending has fallen for three months and job vacancies are at a three-year low. Takashimaya Co., Japan's second-biggest department store, last week cut its full-year sales outlook.

``Japanese consumers find themselves between a rock and a hard place,'' said Takuji Okubo, a senior economist at Merrill Lynch & Co. in Tokyo. ``With mounting evidence of weakening demand, a rate hike by the Bank of Japan is a very remote possibility.''

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net