Japan's Tankan Business Confidence May Fall to a Five-Year Low

By Jason Clenfield

Sept. 25 (Bloomberg) -- Sentiment among Japan's largest manufacturers probably fell to a five-year low amid the worst global financial crisis since the Great Depression, a central bank survey is expected to show next week.

An index that measures confidence among large makers of cars and electronics slid to minus 2 from 5, economists predict the Bank of Japan's Tankan survey will show on Oct. 1. It would be the first time since 2003 that the index is negative, which means pessimists outnumber optimists.

``The consensus view is that Japan is already in a recession,'' said Takehiro Sato, chief Japan economist at Morgan Stanley. ``We expect the September Tankan to reinforce the market's perception that the recession could be longer and deeper than generally believed.''

Bank of Japan Governor Masaaki Shirakawa said last week there's no end in sight to the financial crisis that has erased more than $14 trillion from world markets this year. He said that the turmoil may stifle demand for exports even though the effect on the nation's banks is limited.

Corporate executives filled out their questionnaires for the Tankan in the same weeks as the bailout of Freddie Mac and Fannie Mae and the bankruptcy of Lehman Brothers Holdings Inc.

``You can be sure that current developments are pushing sentiment down,'' said Martin Schulz, a senior economist at Fujitsu Research Institute Ltd. in Tokyo. ``The question is whether the change in sentiment will change long-term investment plans.''

Three-Year Low

The turmoil in the U.S. sent the Nikkei 225 Stock Average to a three-year low and the yen to a three-month high against the dollar last week. A government survey yesterday showed the nation's manufacturers were pessimistic for a third quarter.

Economists predict that Japan's largest companies will keep their spending plans unchanged from the previous survey, when they said they plan to increase investment 2.4 percent this year. While that pace is slower than the average of the past five years, it is still better than reductions made by corporations in the last recession.

Most economists including Morgan Stanley's Sato say the world's second-largest economy is already in a recession after a drop in exports caused the economy to contract an annualized 3 percent in the second quarter. The slump is still not as serious as previous recessions, some say.

`More Moderate'

``What's happening now is far more moderate than what happened in 2001 or 1998 because at those times the domestic corporate sector was under tremendous stress,'' said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. ``Firms and banks were worried about their survival. I don't think that's the case this time around.''

Even if the large manufacturer index falls to minus 2, it would still be above 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.

Economists say companies are better able to withstand the slowdown because they have shed the excess workers, production lines and debt that contributed to a decade of economic stagnation in the 1990s. The debt-to-equity ratio of Nikkei 225 Stock Average companies has dropped an average of 7 percent annually over the past five years, Bloomberg data show.

Oil Price Drop

Further declines in oil prices, which have eased 27 percent since reaching a record in July, could benefit Japanese companies even more than their competitors, according to Julian Jessop, chief international economist at Capital Economics Ltd. in London.

Still, the financial crisis will probably take an indirect toll on the economy, as growth slows in the overseas markets where Japanese manufacturers sell their products.

``Sales in Europe in Asia and Europe are already tanking. The CEOS and theirs boards are extremely concerned,'' Fujitsu's Schulz said. ``I don't think they'll change their entire strategies. But no more business travel, no more new office space, no more new hires.''

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