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Economy in Brief

Japanese Business Confidence Diminishes Ahead of Possible Rate Hike
by Carol Stone June 21, 2006

The recently instituted business survey by Japan's Ministry of Finance showed a distinct slowing in its second quarter results, reported today. The survey is just two years old, so there is obviously not much history. But these results hardly seem surprising with energy prices remaining high, and the Bank of Japan widely expected to engineer an increase in interest rates in the weeks ahead.

The overall "business conditions" gauge dropped from 6.1% (balance, favorable less unfavorable) in Q1 to 1.8% in Q2. It had already retreated from 10.5% in Q4/2005. In the manufacturing sector, business conditions eased this quarter to 1.4% from 3.1% last period.

In Q2, the responding firms assessed "overseas demand" as stronger than "domestic demand". The domestic sector was rated positively for Q2 at a net +6.9% of firms, while overseas demand conditions stood at +9.5%. However, for the prior couple of quarters, the opposite was the case, as domestic activity was positive by double-digit amounts and higher than ratings on the foreign sector by 3 to 4 points.

There is a hint in some of the associated detail, particularly sales, that Q2 may be subject to some seasonality; after companies rush to do business in the final quarter of their fiscal year, Q1 in Japan, the next quarter is something of a letdown. With so little history here, it's premature to make a conclusion about that, but it may help explain the Q2 slowdown.

Meantime, one other aspect of the survey results really stood out. For the first time in this survey, selling prices had a positive reading. It's only +0.6%, but even so, it is still another sign that the deflationary period in Japan may have ended.Nonetheless, rising costs took a greater toll on profits, so after a couple of favorable quarters in that item, it dipped back into negative territory.

JAPAN: Large Firms, % Balance Q2 2006 Q1 2006 Q4 2006 Q2 2005 Q2 2004
Business Conditions 1.8 6.1 10.5 0.9 7.2
    Manufacturing 1.4 3.1 10.5 -2.4 8.9
Domestic Demand 6.9 11.5 14.2 1.4 8.7
Overseas Demand 9.5 8.0 10.2 4.1 12.2
Selling Prices 0.6 -3.2 -2.2 -3.9 -5.8
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