Strong yen batters business confidence in Japan

TOKYO (AP) – Confidence at major Japanese manufacturers fell over the last quarter, as the export-reliant country battled a strong yen and an increasingly precarious global economy, a key central bank survey showed yesterday.

In the Bank of Japan’s “tankan” survey of business sentiment, the main index for big manufacturers fell to minus four, in the first deterioration in two quarters. Three months ago, it stood at two, as companies rebounded from the devastating March earthquake and tsunami in northeastern Japan.

The figure represents the percentage of companies saying business conditions are good minus those saying conditions are unfavorable, with 100 representing the best mood and minus 100 the worst.

The result is slightly worse than Kyodo News agency’s average market forecast for a reading of minus 2.

The tankan “underscored the faltering Japanese economy, which rebounded impressively from the March disaster until early summer but lost its steam from then mainly due to the external factors,” said Masamichi Adachi, senior economist at JPMorgan Securities Japan, in a note to clients.

The world’s No. 3 economy expanded at an annualized rate of 5.6 percent during the July-September period in a robust recovery from the earthquake and tsunami. But that pace has already slowed considerably in the face of global headwinds, economists say.

Large manufacturers certainly don’t expect to feel better anytime soon. The central bank forecasts the index to fall to minus five over the next three months.

Japan has been battling a strong yen, which has hit multiple historic highs this year against the dollar. Amid Europe’s debt problems and economic uncertainty in the US, global investors have looked to the Japanese currency as a relatively safe haven.

But Japan relies on exports to drive growth and offset a rapidly aging and shrinking population at home. The yen’s appreciation has hit companies such as Toyota Motor Corp. and Sony Corp. hard. When the yen climbs, it reduces the value of exporters’ overseas profits when repatriated to Japan.

That has pushed companies to shift more production overseas, prompting worries about a hollowing out of Japanese industry.

Toyota, poised to lose its title as the world’s biggest automaker this year, last week sharply downgraded its earnings forecast for the fiscal year through March and warned of the long-term impact of the runaway yen.

“Because of the strong yen, the collapse of the foundation of Japanese manufacturing has begun,” executive vice president Satoshi Ozawa said.

The most pessimistic of the big manufacturing group was the electrical machinery sector — including audio and video equipment — which tumbled to minus 21 from minus 5. Companies doing business in nonferrous metals and heavy machinery also recorded big declines.

The auto industry, however, showed surprising resilience. Its index jumped seven points to 20, despite the yen and recent parts supply problems due to the flooding in Thailand.

Big non-manufacturers were feeling more optimistic as well. Their confidence index rose to 4 from 1 three months earlier.

The reading for medium-sized manufacturers was flat at minus 3, while the small manufacturers index improved to minus 8, up from minus 11.

The survey, which helps guide monetary policy, showed that large companies overall plan to boost capital spending by 1.4 percent this fiscal year through March 2012. The figure is down from 3 percent in the September survey.

Large manufacturing companies assume an average exchange rate of 79.02 yen per dollar for this fiscal year, compared with 81.15 yen three months ago.

Big companies expect profits to retreat 9 percent this fiscal year after jumping 46 percent last year.

The Bank of Japan surveyed 10,846 companies nationwide between Nov. 14 and Dec. 14. About 99 percent responded.

The bank’s next policy board meeting is scheduled for Tuesday and Wednesday. It is expected to keep its key interest rate near zero.