Japanese business morale improved more slowly in the fourth quarter and large manufacturers surveyed by the central bank planned record cuts in capital spending, as a strong yen threatened a fragile economic recovery. The Bank of Japan's quarterly tankan survey also showed lending to both big and small companies has barely improved from the previous survey in September.
Small companies expect their outlook to worsen in the January-March quarter, reinforcing government fears that a strong yen and deflation could push the economy back into recession before an election for parliament's upper house next year. The BoJ is unlikely to announce new support measures at a policy meeting ending on Friday. But economists said it could take steps next year to avoid pressure from the government, which has limited options on fiscal policy due to a large debt burden.
The government pressured the BoJ this month into launching a new funding operation that has lowered short-term interest rates. It has also criticised the central bank for ending measures that support corporate finance, saying it failed to take tight lending conditions for small firms seriously enough.
"As the effect of government stimulus such as the eco-point system for electrical appliances and incentives for low-emission cars is likely to peter out, the recovery in overall corporate sentiment is likely to stall in the coming quarters," said Azusa Kato, an economist at BNP Paribas in Tokyo. "Such stalled growth might increase pressure on the government to do more, but it would be impossible for it to increase spending in view of the tight fiscal conditions."
If the central bank does not make new moves this week, the minimal improvement in corporate finance, weak corporate spending and a rising yen could add to pressure for more monetary easing next year. The headline index for big manufacturers' sentiment improved to minus 24 in December from minus 33 in September, the BoJ said on Monday, better than analysts had expected. The index hit a record low of minus 58 in the March survey. The median estimate for December was minus 27.
The index for March 2010 was seen at minus 18, showing firms expect conditions to improve over the next three months. In contrast, small manufacturers expect their sentiment index to worsen to minus 42 in March from minus 40 in December. Smaller firms have suffered because they do not make products such as cars and electronics that have received subsidies at home and abroad. These companies also focus more on services and are linked closely with domestic demand, which is weak due to falling wages. Many larger firms, meanwhile, have benefited from a rebound in exports.
Big manufacturers, a key driver of the economy, said they will lower their corporate spending by 28.2 percent in the fiscal year to March 2010, the biggest decline on record.
All large firms plan to cut capital spending by 13.8 percent in the current financial year, more than analysts' median forecast for an 11.3 percent fall. The yen is not far from a 14-year high of 84.82 per dollar it hit last month on trading platform EBS, and that is clouding the outlook for exports and corporate spending.
Large manufacturers expect the dollar to average 92.93 yen in the fiscal year to next March, according to the tankan. That was down from 94.50 yen in the September survey, but manufacturers will have to lower expectations further should the yen continue to strengthen.
Firms rated their financial conditions at minus 8 in December, little changed from minus 9 in September. Financing for large firms was unchanged at plus 6. Financing for smaller companies was minus 16, little changed from minus 18 in the previous quarter.
Japan's Democratic Party-led government is likely to agree this week on guidelines for the budget for the fiscal year from next April 1. The government is under pressure to curb spending as gross public debt is forecast to reach 227 percent of GDP next year, according to the International Monetary Fund.
The government unveiled an $81 billion stimulus package last week aiming to prevent the economy from tipping back into recession as deflation persists and a strong yen threatens exports. Economists say growth could still slow early next year as the impact of stimulus measures introduced by the previous government wanes. The sentiment index for the BoJ tankan is calculated by subtracting the percentage of companies that consider conditions to be unfavourable from those that see them as favourable.
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