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Japan big business more optimistic

CNN's Geoff Hiscock, Asia Business Editor

Deflation remains a problem for businesses in Japan.
Deflation remains a problem for businesses in Japan.

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March 2003 June 2003
Large manufacturers -10 -5
Non-manufacturers - 14 -13
Small manufacturers - 29 - 28
Non-manufacturers - 36 -35
Source: Bank of Japan

(CNN) -- Big business sentiment is improving in the world's second largest economy, the latest Bank of Japan survey shows.

The brighter picture in Tokyo follows figures last week showing industrial production is growing faster than expected, lifting prospects for an economy that has been stagnating for much of the past decade.

The BOJ's closely watched Tankan survey of business confidence, released Tuesday morning, shows the big manufacturers' diffusion index improved from minus 10 in the March quarter to minus 5 in June.

In the large non-manufacturing sector, sentiment improved slightly, up from minus 14 in March to minus 13 in June.

The more optimistic outlook is better than most analysts expected. The result is starting to move the stockmarket, with the Nikkei 225 up about a third of a percent in early trade after opening almost flat.

It is trading 0.35 percent higher to 9114.84, close to six-month highs. The broader Topix is up 0.4 percent to 906.93.

Economics Minister Keizo Takenaka said the direction of the Tankan survey result is within the government's overall expectations.

The BOJ's quarterly business sentiment or diffusion index measures those who report favorable business conditions against those who see unfavorable conditions.

The survey, which covers more than 8,300 manufacturing and non-manufacturing enterprises across Japan, is seen as a key forward indicator of the health of the economy.

The latest survey was conducted between May 30 and June 30, so responses were able to factor in the conflict in Iraq, the SARS illness, and the release in mid-May of figures showing zero growth for the Japanese economy in the first three months of 2003.

Turnaround in demand


2001 GDP in $US billions

1. Japan 4,141
2. China 1,159
3. India 477
4. South Korea 422
5. Australia 369
6. Taiwan 297
7. Hong Kong 162
8. Indonesia 145
9. Thailand 115
10. Malaysia 88
Sources: World Bank,
Taiwan government

Merrill Lynch Japan chief economist Jesper Koll told CNN on Tuesday morning that the Tankan survey showed business spending expectations were up substantially, reflecting a turnaround in "fundamental demand."

He said Japan's export machine was leading the uptake, as a consequence of a rise in global capital spending on technology.

But he said deflation remained a key problem for the Japanese domestic economy, with prices still under downward pressure.

"The risk of a credit crunch remains very large for Japan's small and medium businesses," he said.

Koll described Japan's economy as having a two-tier structure in which the big blue-chip companies were benefiting from the global pickup, but small business and the domestic economy remained ensnared in deflation.

But Koll praised BOJ governor Toshihiko Fukui, saying he deserved "top marks" for the way he and the bank were tackling the long-haul fight against deflation.

Last Friday, figures released by the government showed Japan's industrial output grew 2.5 percent in May from a month earlier, following a fall in April. (Full story)

The seasonally adjusted figure was well above market expectations of about 1.6 percent.

Other figures released Friday showed Japan's jobless rate in May was unchanged at 5.4 percent, just below the record 5.5 percent seen in January.

But Richard Jerram, Tokyo-based economist for ING Financial Markets, told CNN on Friday that while the economy still lacked dynamism, the encouraging aspect was that after two years, it was finally adding jobs.

ING's forecast for Japan's GDP growth in the 2003 financial year ending next March remains at 1.7 percent, well above the consensus forecast of 0.4 percent.

Global bank HSBC is forecasting 0.5 percent growth for Japan in calendar 2003 and 0.0 percent in 2004.

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