Japan's Tankan Sentiment Falls; Profits to Drop 7%

By Jason Clenfield

July 1 (Bloomberg) -- Confidence among Japan's largest manufacturers fell to a four-year low and companies expect earnings to decline for the first time since the 2001 recession.

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. Large companies said profits will drop 7 percent in the year ending March 31, compared with a 0.3 percent increase predicted three months ago.

``This is bad news for Japan's economy,'' said Hiromichi Shirakawa, chief economist at Credit Suisse Group in Tokyo. ``The pessimistic view on profits suggests a vicious cycle from companies to households may slow wage growth and the labor market.''



Record energy and commodity prices are eroding profits at Nissan Motor Co. and Canon Inc., and the U.S. slowdown is rippling through Europe and Asia, stifling demand for Japanese cars and electronics. The economy probably shrank for the first time in a year last quarter as export growth slowed and households cut spending because of costlier food and fuel.

The yen traded at 105.81 per dollar as of 4:57 p.m. in Tokyo from 106.15 before the report. Japan's currency has weakened 3.8 percent since the previous Tankan on April 1. Large manufacturers see the yen trading at 102.74 on average this year.

The Nikkei 225 Stock Average fell 0.1 percent. The yield on Japan's 10-year bond rose 6.5 basis points to 1.675 percent. Economists predicted large-manufacturer confidence to slide to 3.

Slowdown Underway

``The Tankan figures weren't as bad as anticipated, but they indicated an economic slowdown is surely underway,'' said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. ``Rising raw-material costs are squeezing corporate profits, posing downside risks to the economy.''

Large companies said they plan to increase capital spending 2.4 percent this fiscal year, the worst reading for a June survey since 2002, when Japan emerged from its last recession.

Confidence at big service-sector companies fell to a four- year low of 10 points in June from 12 in March, less than economists' expectations for a drop to 8.

The nation's largest manufacturers and non-manufacturers both expect to be less confident three months from now, with their outlook indexes at 4 and 8 respectively. A positive number means optimists outnumber pessimists.

The world's second-largest economy probably contracted at an annual 0.4 percent pace in the second quarter, according to the median estimate of economists surveyed last month.

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.

Costlier raw-materials caused companies' first-quarter profits to fall at the fastest pace since 2002. Nissan's Chief Executive Officer Carlos Ghosn last week said higher steel and rubber costs have become ``practically impossible to absorb.''

Canon will probably report its earnings fell 18 percent in the first half of the year, the Nikkei newspaper reported last month. Crude oil prices have doubled in the past year and reached a record $143.67 a barrel yesterday.

``One of our biggest concerns is the crazy crude-oil prices,'' Shoju Kobayashi, president of Kansai Paint Co., Japan's largest maker of automotive paints, said today in an interview on Bloomberg Television.

Costlier materials will push large manufacturers' profit margins down to 5.6 percent this fiscal year from 6.4 percent for the year ended March, according to today's survey.

`Less to Fear'

That's still almost double that during the past six recessions, and some economists say Japan's businesses may be better able to withstand the current slowdown than before because they have shed excess debt, labor and capacity.

``Companies are much more profitable than they were,'' said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. ``They have much less to fear from a short-term margin squeeze. It's not going to threaten their survival.''

Kobayashi said Kansai Paint forecasts record profit this year as demand from China and India makes up for slower sales in Japan and the U.S.

Nikkei 225 companies' debt-to-equity ratio has dropped an average of 7 percent annually over the past five years to 1.15 times, Bloomberg data show.

Businesses have managed to control costs by trimming staff and keeping wages down, said Tetsuro Sugiura, chief economist at Mizuho Research Institute Ltd. in Tokyo. ``Companies are better prepared to handle external shocks than before,'' he said.

The large manufacturer index, while the lowest since September 2003, is still above the negative numbers recorded during Japan's decade of economic stagnation in the 1990s. 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.

The Tankan survey was conducted from May 28 to June 30 and covered 10,579 companies.

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net
Last Updated: July 1, 2008 03:59 EDT