Tankan results show dimmer outlook

April 5, 2011 - 0:0

TOKYO(WSJ)—Japan's devastating March earthquake and tsunami have made Japanese companies, especially smaller ones, more pessimistic, according to a special release of data from the Bank of Japan on Monday.

The central bank's tankan survey is one of the most closely watched gauges of the economic mood in Japan. Responses for the latest quarterly survey, released on Friday, were due just as the earthquake struck on March 11, prompting the BOJ to issue a special set of data for reports received after that date. Of 11,101 companies surveyed, 24% sent in responses after March 11.
The new figures show that big companies turned pessimistic in their outlook for the next three months, posting a minus-2 reading, compared with a plus-2 reading in the overall figures released Friday. The index represents the percentage of companies saying business conditions are expected to be good minus those saying conditions will be bad.
But the mood is much more negative among smaller companies that depend most heavily on the domestic economy. The outlook for small manufacturers worsened to minus-18 from minus-16, while small nonmanufacturers were highly pessimistic at minus-29, from minus-27 in the overall survey.
The outcome shows that there are ""worries among smaller firms, even if they were not directly affected,"" said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. ""Their businesses may be hurt indirectly as large firms cut back on orders or shift their operations elsewhere.""
Economists also said the data don't likely reflect the full extent of the turmoil ahead. Some of the responses were mailed before the disaster and companies hit most directly probably didn't respond, they said. The central bank itself said Monday's data should be used for ""reference purposes only.""
""Firms had little idea of how the quake will affect their business right after it hit the Tohoku region….I guess it's hard to say in March what's going to happen going forward because it's still tough to create a realistic image of quake damage to the economy,"" said Taro Saito, senior economist at NLI Research Institute.
But analysts expect the indexes to show even more deterioration in the next survey in June, as the impact of the disasters is expected to be clearer by then and companies will have had more time to gauge the effects on their businesses.
""With some 20% of companies already being pessimistic about the outlook, the pace of worsening will likely become much bigger if 100% of firms answer in a similar way"" in the next survey, said Mari Iwashita, chief market economist at SMBC Nikko Securities.
Indeed, exports and industrial production are likely to slow down for a while because the quake destroyed production infrastructure and supply chains in the nation's northeast. Instability in the power supply since the disasters is also expected to have a negative impact on economic activity as well as sentiments among firms and households.
To help reconstruction efforts, Japan's central bank may set up a special lending program to help post-quake funding. Three days after the quake, it jumped into action to temper the economic blow from the disasters, easing monetary policy even further by doubling its asset-purchase program to ¥10 trillion (about $119 billion). It has also supplied ample liquidity to the short-term money market amid growing concerns about the ability of banks to meet a surge in demand for funds from companies and households.
Following the 1995 Kobe earthquake, which affected western Japan, the central bank set up a special facility to refinance reconstruction lending by financial firms with branches in the affected areas. The BOJ then offered a total of ¥500 billion of one-year loans at the 1% policy target rate at the time.
""The Bank of Japan did that in the past, and may do that again,"" said a person familiar with official recovery efforts.
The board will hold a two-day policy-setting meeting starting this Wednesday and will meet again on April 28 to review its semiannual forecasts for the economy and prices.