The Japan Thread

Japan's Tankan Business Confidence Index Rises to 21 (Update1)
Dec. 14 (Bloomberg) -- Confidence among Japan's largest manufacturers rose to the highest in a year, as a weakening yen spurs exports and deflation abates in the world's second-largest economy.

The Bank of Japan's Tankan confidence index climbed to 21 in the fourth quarter from 19 in the third, below the median forecast of 23 in a Bloomberg survey of 37 economists. Non- manufacturers' confidence rose to 17, the highest since 1992, from 15. Economists expected 17. A positive number means optimists outnumber pessimists.

The survey suggests companies including Matsushita Electric Industrial Co. and Toyota Motor Co. may increase hiring and wages after the yen fell 15 percent against the dollar this year, boosting their export earnings. Large manufacturers said price declines are slowing, supporting the Bank of Japan's case for ending its 4 1/2-year deflation-fighting policy.

``The Japanese economy is being propelled by the twin engines of exports and demand at home, and a weakening yen is adding further momentum,'' said Azusa Kato, an economist at BNP Paribas Securities Japan Ltd. ``Favorable conditions are coming all at once, extending the period of economic expansion.''

The yen was little changed at 120.05 against the U.S. dollar at 9:03 a.m. in Tokyo, from 120 before the report was published.

Japan's economy will expand 2 percent in 2006, the Paris- based Organization for Economic Cooperation and Development forecast Nov. 29. That lags behind the OECD's 3.5 percent growth forecast for the U.S. economy and its 2.1 percent estimate for the dozen economies which share the euro.

Close to Ending

Bank of Japan Governor Toshihiko Fukui said Dec. 8 his board ``is close'' to ending its deflation-fighting policy because consumer prices will show ``solid'' gains in the first quarter.

The central bank, which cut interbank overnight loan rates to near zero in March 2001, has focused on providing banks with plentiful reserves to encourage lending and overcome more than seven years of deflation, a policy known as ``quantitative easing.''

Confidence that the economy's expansion is sustainable is one of the three conditions the central bank has set for it to end its policy. The other two are that core consumer prices stop falling for at least a few months and that policy makers are sure they won't resume sliding.

``An improvement in the Tankan index definitely backs up the Bank of Japan's argument for a policy change,'' said Takuji Aida, chief economist at Barclays Capital Japan Ltd. in Tokyo, who predicted the headline index to be 26. ``With consumer prices likely to become positive by the end of the year, it wouldn't be a surprise if the central bank takes action during the first quarter next year.''

Sales, Profits

The Tankan, which means short-term economic outlook, surveys more than 10,000 companies and is the most closely watched index of business confidence in Japan. It asks companies about their outlook for business including sales, profits, spending and employment. Large companies are those with 1 billion yen ($8.3 million) or more in capital. Companies were surveyed between Nov. 10 and yesterday.

Today's report contrasts with the Oct. 3 survey, when confidence gained less than economists had expected because of concern about the effects of record oil prices and the devastation caused by Hurricanes Rita and Katrina on U.S. economic growth.

Since then the price of Oman-Dubai crude oil, a benchmark for Asian refiners fell as much as 13 percent. A government report on Nov. 30 showed the U.S. economy expanded at a 4.3 percent annual pace from July through September, faster than its first estimate of 3.8 percent.

Matsushita, the world's largest consumer-electronics maker, said Dec. 2 it will increase plasma panel production capacity 44 percent to meet demand for its Panasonic-brand televisions. The company's stock has gained 42 percent this year.

Toyota Motor said in November it planned to boost capital spending by 12 percent in the fiscal year to March 31 to a record 1.4 trillion yen from its May forecast, to increase production in Japan and abroad. Shares of the world's biggest carmaker by value have surged 41 percent this year.