Japanís Tankan Confidence Plunges Most in 34 Years
By Jason Clenfield
December 15, 2008

Dec. 15 (Bloomberg) -- Sentiment among Japan's largest manufacturers fell the most in 34 years, signaling companies are likely to cancel spending plans and cut more jobs, pushing the economy further into recession.

An index that measures confidence among large makers of cars and electronics dropped to minus 24 from minus 3, the Bank of Japan's quarterly Tankan survey showed today. A negative number means pessimists outnumber optimists.

The yen's surge to a 13-year high last week has compounded woes for Japanese manufacturers who are already reeling from a collapse in export markets. Job cuts by companies including Sony Corp. and Toyota Motor Corp. have brought the recession home to households and increased the risk of a prolonged slump.

"The overseas situation is worsening so quickly and so dramatically; it's really getting dangerous," said Tomoko Fujii, head of economics and strategy at Bank of America Corp. in Tokyo. "The next few months are going to be a very severe period."

The drop in confidence, which was in line with economists' expectations, didn't dissuade investors from buying stocks on speculation U.S. authorities will help General Motors Corp. and Chrysler LLC avoid bankruptcy. The Nikkei 225 Stock Average climbed 4.7 percent in morning trading in Tokyo. The gauge is down 44 percent this year.

Bank of Japan Governor Masaaki Shirakawa and his colleagues will discuss the Tankan result at a policy meeting ending Dec. 19. The board will probably keep its benchmark interest rate at 0.3 percent at the gathering, according to all 11 economists surveyed by Bloomberg News.

Rate Cut 'Option'

The bank lowered the rate for the first time in seven years in October, and another cut at some point "is an option," former Deputy Governor Toshiro Muto said in an interview on Dec. 11. Still, he added, "with the interest rate already so low, a further reduction would have only a limited impact."

The 21-point decline in the large-manufacturer index was the biggest since February 1975. In the current survey's 34-year history, only a 26-point drop during the first oil shock in August 1974 was larger.

Sentiment among large non-manufacturers fell to minus 9 from 1, entering negative territory for the first time in five years, the central bank said. Large companies said they plan to cut spending 0.2 percent in the year ending March.

"The global financial crisis has caused serious damage to exporters but the repercussion effects are spreading," said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo.

Gloomy Automakers

Sentiment among automakers plunged to minus 41 from 5, the steepest drop ever. Japanese carmakers have been hardest hit by the recession in the U.S., where consumer credit is drying up and household confidence is close to a record low.

Toyota, which forecasts profit will fall 74 percent this fiscal year, last month said it will halve its temporary work force to 3,000 employees. The company is considering production and investment cuts in India, Brazil, China and the U.S.

The yen's 17 percent gain against the dollar since September has lowered the value of overseas sales and undermined the competitiveness of Japanese cars, cameras and televisions.

Japan's currency traded at 90.95 per dollar from 90.68 before the Tankan was published and 88.53 on Dec. 12, the strongest since August 1995. Large manufacturers expect the yen to trade at 103.32 in the year ending March, the survey showed.

The world's second-largest economy shrank in each of the past two quarters, entering the first recession since 2001. Companies will keep trimming production and payrolls in coming months, prolonging the downturn, said Bank of America's Fujii.

Too Many Workers

"The recession is likely to persist through the first half of next year," Fujii said. "We have tighter lending conditions, excess capacity, excess labor -- these all point to downside risks in the pipeline."

The capacity index for large manufacturers climbed to 11 points from 2, the highest since March 2004. A measure of labor demand rose to a four-year high of 8 from minus 2, the first time companies said they had too many workers since 2005.

Sony last week said it would fire 16,000 employees worldwide, including 8,000 full-time staff. Canon Inc., Sharp Corp. and Nissan Motor Co. eliminated temporary and part-time positions over the past month, pushing consumer sentiment to a record low and stoking anxiety among voters.

Prime Minister Taro Aso, facing tumbling approval ratings, last week announced his second economic stimulus package since becoming leader in September. Aso still hasn't submitted a bill to parliament to fund measures announced in October.

LDP Rift

The ruling Liberal Democratic Party may split apart before elections required by September 2009 because lawmakers don't believe victory is possible under Aso, independent lower-house member Kenji Eda said last week.

Big companies expect business to get worse in coming months. Large manufacturers see their index falling to minus 36 in the next survey in April, and service companies expect a drop to minus 14 points.

Some economists downplayed the result.

"These forward-looking indicators have a rather poor track record when it comes to predictions," said Jan Lambregts, head of Asian research at Rabobank International in Hong Kong. "It could have been a whole lot worse."

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net
Last Updated: December 14, 2008 22:18 EST

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