Yen Surge feeling Manufacturer likely tempered adding pressure on the Bank of Japan

The Bank of Japan’s Tankan survey will probably show a slowing pace of improvement in business confidence, adding to pressure on policy makers to counter gains in the yen by injecting more cash into the economy.

A quarterly index of sentiment at large manufacturers rose 6 points in September, the least since March 2009, according to the median forecast of 19 economists surveyed by Bloomberg News. The Tankan report is due at 8:50 a.m. on Sept. 29 in Tokyo.
The slowing reflects warnings from companies from Nissan Motor Co. to Canon Inc. that the yen’s climb to the highest level since 1995 will impair earnings. With the impact of this month’s currency intervention fading, Prime Minister Naoto Kan’s government may step up calls for the Bank of Japan to expand efforts to safeguard the economy’s recovery.
“Companies are becoming more anxious about the business outlook because of concern over slower global growth and the yen’s gain,” said Minoru Nogimori, an economist at Nomura Securities Co. in Tokyo. “If the Tankan shows weakness, it may build up pressure on the central bank to do what needs to be done.”
BOJ Governor Masaaki Shirakawa yesterday reiterated that the bank is monitoring the impact of the yen on the economy and that “we are ready to implement appropriate action in a timely manner if judged necessary.” He spoke at a forum hosted by the Japan Society of Monetary Economics in Kobe, western Japan.
Weakening Outlook
The median forecast for the Tankan’s large manufacturer index is a reading of 7; positive numbers mean optimists outnumber pessimists. The report may show that companies forecast the index to retreat to 3 in December, according to the Bloomberg News survey.
Bank of Japan Board Member Ryuzo Miyao said last week that it’s necessary to pay more attention to downside economic risks because of growing uncertainties over the outlook, mainly in the U.S. The Federal Reserve signaled Sept. 21 it’s prepared to ease monetary policy further to spur growth, a statement that sent the dollar tumbling against the yen and euro.

The yen climbed to as high as 82.88 per dollar, a level unseen since 1995, prompting Japan to sell the currency for the first time in six years on Sept. 15. It recouped some of the intervention losses last week, closing at 84.21 late in New York on Sept. 24th after dropping in Tokyo earlier that day amid speculation officials had intervened again.
Top Performer
Japan’s currency has advanced 10 percent this year against the dollar, the most among the most-traded currencies, as slowing U.S. growth and Europe’s debt woes made it a haven for investors, given the nation’s current-account surplus.
Even a level of 90 to the dollar may not be enough to prevent production draining out of Japan, said Toshiyuki Shiga, chairman of the Japan Automobile Manufacturers Association, and chief operating officer of Yokohama-based Nissan, Japan’s third- biggest carmaker, said Sept. 16.
Canon, which is based in Tokyo and is the world’s largest camera maker, estimates that operating profit will shrink that operating profit will shrink by 4.7 billion yen for every 1 yen the currency strengthens beyond 90 per dollar in the second half of 2010.
In addition to the currency, growth may be affected by the ending of incentives for purchases of energy-efficient cars this month.
Fading Stimulus
“The Japanese economy will likely slow sharply in the October-December period as policy stimulus fades,” said Takehiro Sato, Japan chief economist at Morgan Stanley MUFG Securities Co. in Tokyo. Sato said the BOJ may revise down its economic assessment when it releases its latest outlook on Oct. 28, and a further loosening of credit could be announced then.
Options include increasing purchases of government bonds, shifting to a target band of between zero and 0.1 percent for the key overnight lending rate, and adopting some form of an inflation target, Sato said.
Miyao said last week the central bank won’t rule out any options, including buying more bonds. Shirakawa reiterated this month he’s unwilling to abandon a BOJ practice of keeping bond holdings at less than the amount of bank notes in circulation.
The central bank expanded a credit program for lenders by 10 trillion yen ($118 billion) to 30 trillion yen at an emergency board meeting on Aug. 30. The bank kept the key rate at 0.1 percent and its monthly target for government bond purchases at 1.8 trillion yen this month. BOJ board members are next scheduled to meet on monetary policy Oct. 4-5.
Avoiding Contraction
A slower improvement in business confidence doesn’t necessarily mean Japan’s recovery from its deepest postwar recession will end, according to Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo.
“The Tankan will likely provide evidence to confirm that Japan’s economy is on a recovery track,” Kumano said. “The slowdown trend in global growth doesn’t mean the global economy is heading for a recession, and it’s just adjusting a speed of growth to reflect a moderate expansion in demand.”
The Tankan also may show that companies’ forecasts for capital outlays this fiscal year have increased.
All large companies aim to boost spending by 3 percent in the year ending March 31, after planning to boost 2.7 percent three months ago, according to the Bloomberg News survey. The figures are based on the new accounting standard for lease transactions. Based on the previous accounting rule, companies planned to increase spending by 4.4 percent in June.
To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net
To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net
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