Japan's Business Confidence Rises to Two-Year High
By Lily Nonomiya
Oct. 2 (Bloomberg) -- Japan's business confidence unexpectedly rose to a two-year high in September, increasing prospects that the central bank will raise interest rates by the end of the year.
The quarterly Tankan survey, Japan's most closely watched gauge of business sentiment, showed confidence among large manufacturers climbed to 24 points from 21 in June, the Bank of Japan said today in Tokyo, beating forecasts the number would be unchanged. The companies plan to increase spending 11.5 percent in the year ending March 31, the fastest pace in 16 years.
Yields on five-year notes rose the most in three months on expectations the Bank of Japan may increase its benchmark interest rate from 0.25 percent, the lowest among Group of Seven nations. Industrial output in the world's second-biggest economy rose to a record last month as companies expanded production to meet demand that sent export volumes to a record in August.
``The Bank of Japan has not given up on a rate hike this calendar year,'' said Huw McKay, senior international economist at Westpac Banking Corp. in Sydney. ``It's the capital spending plans that will be getting the Bank of Japan's attention.''
Yields on Japan's benchmark five-year notes rose 6 basis points to 1.185 percent at the close in Tokyo. The median forecast of 28 economists surveyed by Bloomberg News was for the index to be at 21 points. Confidence is expected to fall to 21 points in December, large manufacturers said.
Next July's Election
Prime Minister Shinzo Abe, who replaced Junichiro Koizumi as Japan's leader last week, said today his government is aiming for annual 2.2 percent economic growth for the next 10 years. The economy grew 2.6 percent in 2005, the fastest pace in five years. Abe is counting on sustained expansion to support his campaign to win an upper house election in July.
Bank of Japan policy makers including Atsushi Mizuno say the economy's performance has been in line with expectations and the bank will keep raising rates ``gradually.''
``We haven't seen signs that the rising momentum of capital spending is easing,'' Mizuno said in an interview on Sept. 12. ``If the next Bank of Japan Tankan survey were to show that capital spending plans are being revised up further, and we determine that the increasing trend of capital spending is likely to stay intact,'' policy makers will need to judge whether the economy is growing faster than the bank projected.
Rate Decision
Five of 14 economists surveyed by Bloomberg News between Sept. 11 and 20 said they expect the Bank of Japan to raise its benchmark lending rate before the year's end, with another five expecting an increase by the year ending March 31. The bank raised its key lending rate to 0.25 percent in July.
``The Bank of Japan may take advantage of the strong capital expenditure number to argue that it may lead to excess supply and cause the economy to overheat,'' said Takashi Omori, chief economist at UBS Securities Japan Ltd., in Tokyo. Omori, a former economist at Japan's Cabinet Office, expects an interest rate increase as soon as January.
The Tankan, which means short-term economic outlook, surveyed 9,863 companies between Aug. 30 and Sept. 29. It asks companies about their outlook for sales, profit, spending and hiring.
Large companies said profits will probably rise 1.7 percent this year, more than the 0.8 percent forecast in June. Large manufacturers said they plan to increase spending 16.9 percent, above the 16.4 percent projection in June.
Companies including medium and small-sized enterprises said they plan to increase spending 8.3 percent this year, above the 6.2 percent June prediction.
Outlook for Yen
Large manufacturers said they expect the yen to trade at an average 111.64 in the year ending March 31, weaker than the 111.09 rate they predicted in June. The yen has fallen 3.8 percent against the dollar and 8.8 percent against the euro in the past 12 months, according to Bloomberg data.
A decline in oil prices since August and a weaker yen helped drive the increase in sentiment, economists said.
Toyota Motor Corp., the world's second-largest automaker, raised its profit forecast for the six months ended Sept. 30 by almost a third last month because of stronger export demand and a weaker yen.
The yen has slipped 3.2 percent against the dollar since the release of the July Tankan. The price of Dubai crude oil, a benchmark for Asian refiners, fell 13 percent since August.
Murata Manufacturing Co., a maker of ceramic components used in mobile phones and personal computers, said last week it would increase spending on factories by 57 percent to 80 billion yen ($678 million) this fiscal year.
Labor Demand
``Underlying demand is very solid,'' said Kenjiro Shigematsu, president of Sumco Corp., a maker of semiconductor wafers. ``Unfortunately we are unable to make enough to meet customer demand now, so we are doing all we can to increase production.''
Confidence among retailers, construction companies and other service providers was unchanged at a 16-year high of 20 points. Non-manufacturers said they expect confidence to rise to 21 points.
Demand for labor among Japan's largest manufacturers is the strongest in 14 years. The index of labor demand among large manufacturers was unchanged at minus 2 points in September, the highest since 1992.
Small manufacturers said they plan to increase capital spending 3.3 percent this year, compared with a 1.3 percent cut in spending they predicted in June. Sentiment among small manufacturers fell to 6 points, the first deterioration in six quarters. Confidence among small non-manufacturers fell to minus 8, the first drop in two quarters.
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