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Japan Business Confidence Falls to Lowest in a Year (Update13)

Japan Business Confidence Falls to Lowest in a Year

April 1 (Bloomberg) -- Confidence among Japan's large manufacturers unexpectedly fell to the lowest in a year, reflecting concern that rising oil and commodity prices threaten a recovery in the world's second-largest economy.

The confidence index fell to 14 points in March from 22 in December and a 13-year high of 26 in September, the Bank of Japan's quarterly Tankan survey showed in Tokyo today. The median forecast of 41 economists surveyed by Bloomberg News was for no change. A positive number means optimists outnumber pessimists.

The biggest drop in confidence since September 2001 adds to signs that a recovery from recession will stall, after reports this week showed falling factory production and household spending. Companies including Matsushita Electric Industrial Co. say higher prices of oil, plastics and metals are curbing profit growth, leaving them less money to hire workers and buy machines.

``The economy's lull will probably continue for longer than we had expected,' said Teizo Taya, a former Bank of Japan policy maker who is now special counselor at Daiwa Institute of Research in Tokyo. ``The recent slump in exports and output and rising prices for raw materials has affected the confidence indexes.'

The yen was at 107.22 to the dollar at 11:53 a.m. in London from 107.15 late yesterday in New York, trading close to a five- month low of 107.70 on March 30.

The Nikkei 225 Stock Average rose 0.5 percent to 11,723.63 at the 3 p.m. close of trading in Tokyo. The index had its third straight weekly loss, dropping 0.3 percent. Ten-year bond erased an early gain to close little changed as investors focused on predictions for an increase in jobs in the U.S., Japan's largest export market.

Earnings, Investment

Confidence deteriorated for two straight quarters for the first time since September 2001 and fell to its lowest since a reading of 12 in March 2004.

The central bank's survey of 1,191 large manufacturers indicated companies will rein in investment as earnings growth slows. Manufacturers will limit increases in capital spending to 3.4 percent this year, compared with 22.7 percent last year. Profit growth will slow to 1.1 percent in the business year starting today, from 25 percent last year, executives predicted.

``There are still uncertainties surrounding movements in currencies, oil and steel,' Pioneer Corp. President Kaneo Ito said in an interview yesterday. The company last week said it will cut 2,000 jobs, or about 5 percent of its workforce, to reduce costs.

Tokyo-based Pioneer plans to spend between 40 billion yen ($372 million) and 50 billion yen over the next two or three years, compared with the 70 billion yen it planned to spend in the business year that ended yesterday. The company said it probably had its first annual loss in nine years on falling prices of DVD recorders, televisions and car electronics.

Commodity Prices

Cooling global demand for consumer electronics is crimping manufacturing growth in Japan. Industrial production fell 2.1 percent in February from January, the biggest decline in a year. Exports grew at the slowest pace in more than a year in February.

Higher costs of crude oil and raw materials are also squeezing profits. Japanese manufacturers have trouble passing costs on to customers as consumer prices extend almost seven years of declines.

``Japan hasn't emerged from consumer price deflation yet, so it's very difficult to ask customers to accept the burden of rising raw materials prices,' Itaru Koeda, co-chairman of Nissan Motor Co., Japan's second-largest automaker, told reporters March 17.

Osaka-based Matsushita Electric Industrial, the world's largest maker of consumer electronics, said costlier materials and energy cut its profit by 12 billion yen, or a third of the total, in the quarter ended Dec. 31.

`Plateau'

Japan fell into its fourth recession since 1991 early last year following a global slump in demand for electronics. The economy grew at a 0.5 percent annual pace in the fourth quarter, compared with a 3.8 percent rate in the U.S., the world's largest economy.

``The economy remains at a plateau, but our view that the overall recovery is intact hasn't changed,' Fiscal and Economic Policy Minister Heizo Takenaka told reporters today.

The Tankan, which means short-term economic outlook, surveyed 10,443 companies between Feb. 24 and March 31 and is the most closely watched index of business confidence in Japan. It asks companies about the outlook for sales, profits, spending and employment. Large companies are those with 1 billion yen or more in capital.

Crude Oil

Manufacturers paid more for raw materials and energy for 12 consecutive months after their costs fell for three years. Producer prices rose 1.3 percent in February from a year earlier, a Bank of Japan report showed on March 10.

Dubai crude oil, a benchmark for Asian refiners, rose to a record $47.79 per barrel on March 17. The average price of Dubai crude has risen 58 percent in the past year.

A stronger yen may cause more problems for exporters. Manufacturers said they expect the yen to trade at 104.57 against the dollar in the six months ending Sept 30 and at 104.52 in the year starting today.

Confidence among large retailers, banks, real estate companies and other non-manufacturers was unchanged at 11 points in March. Non-manufacturers expect confidence to fall to 10 points in the June survey, the report said.

Signs that a slide in Japanese land prices may be ending boosted confidence among real estate companies to 20 points from 14. Average residential land prices rose in Tokyo's five main wards rose last year for the first time since 1987, the government said on March 23.

To contact the reporter on this story:
Lily Nonomiya in Tokyo at [e-mail]

To contact the editor responsible for this story:
Christopher Wellisz at [e-mail]


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