Business confidence among Japanese companies has improved sharply, mainly because production facilities damaged by the Great East Japan Earthquake recovered earlier than expected, the Bank of Japan's Tankan quarterly survey showed Oct. 3.
Business confidence among Japanese companies has improved sharply, mainly because production facilities damaged by the Great East Japan Earthquake recovered earlier than expected, the Bank of Japan's Tankan quarterly survey showed Oct. 3.
But that optimism is already overshadowed by the yen's sharp appreciation and the lingering European sovereign debt crisis.
The diffusion index for large manufacturers rose to 2, up 11 points from the previous June survey for the first positive reading in two quarters.
The index for large nonmanufacturers rose to 1, up 6 points.
The index is calculated by subtracting the percentage of companies reporting unfavorable business conditions from the percentage of companies reporting favorable conditions.
A positive reading means optimists outnumber pessimists.
In particular, the diffusion index for automakers shot up to 13 from minus 52 in the June survey because parts supply networks disrupted by the March 11 earthquake recovered.
Among small and midsize companies, the index for manufacturers rose 10 points to minus 11. For nonmanufacturers, the figure was up 7 points to minus 19.
Still, the September survey showed that business executives remain cautious about economic prospects.
The diffusion index for large manufacturers is expected to improve only 2 points in the coming three months. The index for large nonmanufacturers will likely stay flat.
Among small and midsize companies, both manufacturers and nonmanufacturers expect that their indexes will worsen.
Exporters will be hard hit if the yen's value remains at current historic levels against the dollar.
According to the September survey, big manufacturers used an average exchange rate of 81.15 yen against the dollar for their business plans for fiscal 2011.
The exchange rate is the strongest for the yen since fiscal 1996, when the BOJ began collecting such data. The Japanese currency has recently been trading in the upper 70 yen range.
If large companies relocate production overseas to cope with the strong yen, small and midsize companies, which are not able to transfer their operations as easily, will continue to face difficulties.
Personal consumption, which has begun to pick up, will also lose momentum if domestic jobs are lost.
The yen has been strengthening partly because investors are selling the euro and the dollar due to uncertainties about the Western economies and shifting their assets to the Japanese currency, which is considered relatively safer.
The largest concern is the European sovereign debt crisis, triggered by Greece's fiscal problems.
It could spread to Spain and Italy, fueling anxiety about European financial institutions, which hold large amounts of euro-zone government bonds.
The prospects for the U.S. economy are also bleak, with unemployment stuck at high levels.
(This article was compiled from reports by Sawa Okabayashi and Toru Hatanaka.)