What This Recovery Tells

Business confidence among major manufacturers has improved, according to the Bank of Japan's closely watched Tankan economic outlook survey for September.The survey showed business confidence among major manufacturers up three points to plus 24 in the key diffusion index (DI) for the second straight quarterly rise.

The DI figure is calculated by subtracting the percentage of companies reporting unfavorable business conditions from that of those reporting favorable conditions. BOJ announces the Tankan survey every three months. The latest survey was conducted from Aug. 30 to Sept. 29, covering 9,863 firms.

Here's the excerpt:

The Yomiuri Shimbun
Oct. 3, 2006

The first survey since the central bank ended its five-year zero-interest policy in July confirmed the steady overall economic improvement was sustained even with the interest rate above zero. Analysts said the figures were above market expectations, and that the result might encourage the central bank to go forward with another interest rate increase in coming months.

The improvement in business sentiment was especially notable in raw material-related industries and exporters that benefitted from declining oil prices and a weaker yen. The survey also showed a rise in corporate manager sentiments that there are human resource shortages.

.....As for capital investment in plants and equipment, major manufacturers in all industries planned to spend an average of 11.5 percent more in fiscal 2006 than the previous year. The figure was at the highest level since fiscal 1990's September survey, near the height of the nation's bubble economy.

The employment index, which is calculated by subtracting the percentage of companies reporting underemployment from that of those reporting overemployment, was three points down from the previous survey at minus eight for all industries of all sizes, meaning that more companies are becoming shorthanded. This feeling of employment shortage was the greatest since August 1992.

The biggest contributor to the improvement in major manufacturers' business sentiment was the strong performance of raw material industries. The slowdown in crude oil prices helped raw material firms such as steel and nonferrous metal makers turn profits, while also succeeding in passing on earlier high oil costs in sales prices. The DI figure for steel manufacturers rose 14 points to plus 53, and rose 13 points to plus 41 for nonferrous metal makers.

Though small and midsize companies lag big firms in business sentiment, their projection for capital investment reflected growing optimism among corporate managers.

The concern now is the deceleration of the U.S. economy. Japan's exporters may lose momentum if demands abroad continue to slow down. Some analysts even think the nation's economy has already peaked, and are alarmed another interest rate increase could severely hurt the financing of small and midsize companies.

According to the above excerpt, there are mainly three characteristics of the recent recovery of the Japanese economy:

(1) The improvement in raw material-related industries and exporters

The slowdown in crude oil prices enabled raw material firms such as steel and nonferrous metal makers to turn profits, while also passing on earlier high oil costs in sales prices. Declining oil prices, a weaker yen and booming China and US boost up the exporters.

(2) The employment shortage for all industries of all sizes

More companies are feeling shorthanded. It seems that the Japanese economy is picking up. This is, however, rather the sign that Japanese economy is becoming aged: The number of retiree is sure to increase, while decreasing younger workers. So many companies need hiring workers so as not to face the shortage of human resource.

(3) Weaker sentiment in small and midsize companies

This recovery might be merely big firms'. Many small and midsize companies might not be benefitting from this recovery. Most of all companies in Japan are small and midsize ones, which is, in terms of the number of firms, about 70 percent of all firms. In this regard, the increasing profit from the recovery is unlikely to be distributed fairly among most companies and workers. It can say that it is far from the true recovery that improves the life of every member of our economy.