Japan: Big Business Still Gloomy, But Economy Isn’t Going Backwards

The best that can be said from the latest Tankan survey of sentiment among medium and large Japanese companies is that it didn't fall.

But then it was expected to rise in the latest report, released yesterday by the Bank of Japan.

For Australian investors and companies, the news is interesting because it shows the Japanese economy is still struggling to exit a deflationary crush that has had control for much of the past few years.

But that's not to say the outlook is vastly better than a year ago in the immediate aftermath of the March 11 quake, tsunami and the Fukushima nuclear disaster.

Japan remains our second biggest trading partner, and we are continuing to export more thermal coal and especially LNG to the country to help make up for the lost power capacity from the close of 53 of the country's 54 nuclear reactors and their power stations.

Reading the survey there's a strong suggestion that big Japanese companies remain hunkered down in a damage control stance, scared of the strong yen, the sluggish economy and fearful about the strength of the US, European and Chinese economies.

The survey was unchanged from the December Tankan at a reading of minus 4, which indicates continuing pessimism and that siege-like mentality.

By way of contrast, the usual monthly PMI's for manufacturing in other economies showed a big rise in the uS, solid and surprising growth in the UK and more weakness in Europe, especially France.

But Japan remains mired in gloom with big manufacturers predicting that business sentiment will improve slightly to minus 3 in the next survey in June, while large non-manufacturers expect their sentiment index to remain unchanged at plus 5.

The Japanese stockmarket, which had been looking a bit overbought after the solid first quarter gain, shrugged off the disappointing news and rose 0.6% yesterday, taking the gain so far this year to almost 20%.

Market reports said investors preferred to concentrate on the rise in the performance of manufacturing survey among big Chinese companies that was released on Sunday and was the bullish of the two (the HSBC survey of smaller companies showed a sharp drop).

(Chinese markets were closed yesterday for holidays.)

From looking at the report and the various commentaries, it could be that big business isn't ready to accept the Bank of Japan's move to expand its spending and set an inflation target, announced on February 14.

That change of policy has seen the yen lose 7% of its value against the US dollar, and that in turn has powered the stockmarket higher, contributing most of the 19.3% gain in the first quarter.

The yen hit a post-World War II high of 75.35 against the dollar in October, yesterday it traded at just over 83 yen to the greenback.

The bottom line is that sentiment among Japan's largest manufacturers failed to improve in March as executives predicted the yen will rebound against the dollar, hurting exporters' sales and profits.

The report showed that executives expect the sentiment index to remain negative at minus 3 in June and the yen to strengthen about 6% from today's level to average 78.14 per dollar this fiscal year.

The results are likely to fuel expectations for additional easing by the BOJ.

The central bank's policy board is scheduled to hold its next policy-setting meeting April 9-10 and it meets again on April 27.

The BOJ in February decided to increase the asset-purchase fund by a sizeable Y10 trillion ($A120 billion) to Y65 trillion.

It also introduced for the first time what amounts to a numerical target for inflation, pledging to keep easy monetary policy until a 1% inflation goal is in sight.

A sharper than expected rise in inflation in February, reported last week, encouraged speculation that the policy was having an immediate impact. The core inflation rate rose 0.2% from January, so the rise in oil and petrol prices wasn't the cause.

The Tankan showed that sentiment among large non-manufacturers improved slightly to plus 5 in March, compared with plus 4 in December and plus 5 in economists' forecast.

Big manufacturers and non-manufacturers plan to keep capital spending at the same level in the new fiscal year that started on Sunday, April 1.

And elsewhere in Asia, good news for another important Australian export market.

Moody's Investors Service yesterday raised South Korea's rating outlook to positive from stable on Monday, citing the country's "very strong and improving" fiscal fundamentals and resilience in its external financing position.

Moody's currently has an A1 rating on South Korean government bonds.

"Korea's fiscal fundamentals are very well placed among its like-rated advanced and emerging economy peers," Moody's said in a statement.

"The vulnerabilities exposed during the height of the global financial crisis -- namely, the banking system's reliance on offshore dollar funding -- are being effectively addressed," the ratings agency added.

South Korea's market rose 0.8%, boosted by the ratings news.