By Jason Clenfield
Sept. 28 (Bloomberg) -- The Bank of Japan’s Tankan survey will probably show this week that the economic recovery is too weak to convince companies to invest.
Large firms plan to cut capital spending by 9 percent this year, little changed from estimates made three months ago as the nation was emerging from a recession, economists predict the Oct. 1 report will show. Sentiment among big manufacturers is expected to gain for a second period after March’s record low.
Toyota Motor Corp., which has benefited from worldwide government efforts to boost consumption, is still producing a third fewer cars than it is able to build. Bank of Japan Governor Masaaki Shirakawa said this month that while the economy is showing “signs of recovery,” he’s not confident that demand will hold up.
“Whatever the improvements, the absolute level of economic activity is extremely low, much lower than in the initial stage of previous economic recoveries,” said Kiichi Murashima, chief economist at Nikko Citigroup Ltd. in Tokyo. “Plans for business investment should remain very weak.”
Gains in the yen are compounding exporters’ woes by making their products more expensive and eroding the value of profits earned abroad. The Japanese currency climbed to 89.17 per dollar at 11:40 a.m. in Tokyo after earlier reaching an eight-month high of 88.24. The Nikkei 225 Stock Average dropped 2.4 percent.
Pare Spending
Companies in the central bank’s June survey said they plan to pare spending 9.5 percent this year.
The Tankan index of sentiment among large makers of cars, electronics and other goods will rise to minus 33 from minus 48 in June, analysts forecast. The improvement would only restore the index to a level on par with that during the depths of the 2001 recession. The index fell to a record low of minus 58 in March. A negative number means pessimists outnumber optimists.
“It’s not a question of getting happy, it’s a question of getting less miserable,” said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. “Financial markets have stabilized, financing is clearly available and you have some sense of where final demand is going.”
Japan’s export markets are showing signs of picking up. Federal Reserve Chairman Ben S. Bernanke said this month the “recession is very likely over” and the Fed last week indicated the economy has improved enough to allow some emergency lending programs to be scaled back.
Toyota’s U.S. sales rose for the first time since April 2008 in August, buoyed by the government’s “cash for clunkers” program. The automaker will likely raise global production this year by half a million vehicles to meet demand for its Prius hybrid and replenish inventories, the Nikkei newspaper reported last week.
Toyota Output
Even with the increase, output will be one third below the 10 million units that Toyota is able to build. The company forecasts a 450 billion yen ($5 billion) loss this year.
Growth in China, which this year surpassed the U.S. as Japan’s biggest export customer, has also been a boon to manufacturers. Sharp Corp. says subsidies to encourage spending on household appliances will help boost its China sales about 3 percent this year.
About 40 percent of Japan’s factory capacity still sits idle after five months of production increases, weighing on corporate profitability and giving companies little reason to invest or hire. Some $2 trillion in global stimulus measures, coupled with replenishment of inventories, are only providing a temporary boost to sales.
“This is not what will drive the economy into sustainable growth,” said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. “There isn’t much original demand from the market side, from the household side, or from the corporate side.”
To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net
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