Japanese business landscape looks rocky for this month

A survey carried out by Shoko Chukin Bank of over a thousand companies has revealed that sentiment has deteriorated for the third month in a row for mid and smaller sized Japanese companies.

The study seems to confirm the view that only the financial giants have benefitted from the nation’s recent economic development.

Another prominent report by Bank of Japan, the tankan business sentiment survey which is delivered quarterly, will be released next week and will be closely observed by the financial community.

Any interest rate hike by the BOJ will be dependent on these important sentiment studies and traders will be looking on anxiously for signs as to when the hike is likely to occur. At the moment the general opinion is that it will come in August.

The key threshold for the diffusion index that the Shoko Chukin Bank carried out to measure business sentiment is 50 percent. The result of the index was below that for the third straight month, coming in at 48.3 and is nearly 1 percent down on May.

The forecast for next month is still under the threshold figure, indicating negative overall business conditions. Any figure over 50 would be positive.

In the area of manufacturing, the DI figure increased slightly by 0.4 percent but still remained under the 50 mark. Non-manufacturing didn’t fare any better, falling under 50 for the first time in 90 days.

Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management commented on the study, “There seems to be some disparity between the smaller and larger firms in the country. A lot of the smaller businesses are subcontractors for the giants, so the business conditions are going to diverge quite a bit.”

Poulsen added, “The growth that we’ve seen in retail is going to slim down a little in the coming months, raw material costs are getting higher as well which means the mid to small firms are really going to struggle.”

As expected, a Reuters survey of 30 economists released last Thursday revealed that the bigger companies will be unperturbed by the BOJ tankan business conditions, while amongst smaller companies sentiment is almost certain to be worse than the same report in the first quarter.

Japan: The year in figures, and its future

It was a telling economic year for Japan with two significant economic events in 2006.

The major one was the central bank halting its monetary easing policy in March and raising the basement short term interest rate to one quarter of a percent four months later, which brought to a close over five years of “zero interest rate” economic policy.

The Bank of Japan’s actions also had the effect of bumping its discount rate from 0.2 percent to 0.35 percent.

Another major positive development was the scope of Japan’s economic expansion. It’s been the longest expansion post WW2 since the famed Izanagi boom in the late sixties.

Of course, the explanation for recent interest rate hikes is the long term recovery of the nation’s economy, contrary to the sentiment of most of the population even in the face of over four years of expansion.

It is understandable that many are confused at the lack of agreement between official governmental figures and the sentiment of Japan’s public at large, so what is the reasoning behind it?

From what we can tell, there are three main reasons for the discrepancy.

Firstly, the rate of the country’s economic growth is extremely slow compared to the Izanagi boom. A two percent expansion doesn’t exactly make big headlines at street level.

A secondary consideration is the wealth gap between the rich and poor regions in the nation, and levels of society. In the time period just after the war the economic recovery was much more evenly distributed and did not discriminate between region and person.

Thirdly, one has to remember the sheer lack of inflationary pressure present that can be used to boost corporate sales. This has the effect of forestalling the movements of prices in the country into positive territory.

There is one thing different about the world today, and that is globalization. Economic booms simply don’t happen at the rate and scope that they used to when raw material, products and even land and wages are being exposed to international competition. Great expansion just doesn’t automatically mean a quick and tangible increase in the standard of living anymore.

What does the future hold for Japan? Many experts feel a definite recession is looming as expansion seems to have run its five year course.

However, Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management believes that 2007 will be an even better year for expansion than this year. “When you look at the big picture you understand that the Japanese economy is dependent mostly on its exports and foreign capital investment. Both of which continue to be strong and show no sign of letting up.”

Japan wants to build EU type financial community

Japan wants to dwarf both the NAFTA and EU trade blocs by creating the world’s biggest economic community which would comprise 16 Asian countries.

The bloc, which Japan hopes will integrate economies in the region better, would contain nearly half the global population, a large portion of which would be due to India and China which also happen to be the world’s most rapidly developing economies.

Japan's Ministry of Economy deputy director, Takeshi Fujimoto, revealed that ASEAN countries would be included in the new community and that a press release regarding the plans would be released on Thursday.

Fujimoto said he hoped that talks regarding the bloc would be completed by 2010.

Japan have laid nearly all the groundwork for the upcoming talks and according to their data the new trade agreement would benefit the nations involved with an increase of GDP to the tune of 30 million yen.

It is only Japan’s frosty relationship with China that has stopped the trade group forming in the past, most of the angst stemming from World War Two, when a substantial number of Chinese were killed by the Japanese.

Chinese authorities were unimpressed by a recent visit by the Japanese PM to a shrine dedicated to dead soldiers which happens to include hundreds of war criminals in the list of deceased “heroes”.

Regardless of the political hostility between the two nations, there are plenty of calls from the private sector for a trade agreement between the two economic giants and the rest of the region.

Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management, who manage over $5 billion of funds in the region, said in a phone interview, “Japanese corporations are highly motivated to push the government forward with these plans. It’s obviously in their interest to build up an EU type financial community, especially in the industrial sector.”

Poulsen added that the agreement will be a “mighty challenge” because of the pure scale and that it will be difficult to please everyone in the first round of talks.

“It’s interesting that Japan wants to include Australia and India, two very strong economies. Could this be intended as a check on China?” Poulsen said.

Both China and Japan have agreements already in place with various neighbours.