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Japanese business sentiment drops to 2-year low

Tankan survey results boost expectations that rate hike will be delayed to second half

TOKYO – BIG Japanese manufacturers’ business sentiment has slipped to a two-year low, a Bank of Japan (BOJ) survey showed yesterday, reinforcing expectations that a rise in interest rates will be delayed to the second half of next year.

Rising raw material costs, plummeting construction activity due to tighter building rules and fears of a United States recession because of the credit crisis all played a part in eroding optimism.

But the BOJ’s tankan survey this month also showed that companies are sticking to their robust capital spending plans, and sentiment at small manufacturers showed a surprising improvement, allowing financial markets to take the data largely in stride.

‘The outlook has sharply deteriorated, and the risk of an economic downturn has increased,’ said Mr Yasuhiro Onakado, chief economist at Daiwa SB Investments.

‘A rate hike by the Bank of Japan may have to wait until after the middle of next year.’ The yen dipped to a one-month low of 112.66 yen per US dollar, which in turn helped boost the Nikkei share average by about 0.6 per cent in morning trade.

Swap contracts on the overnight call rate, the BOJ’s main benchmark, are pricing in only a 5 per cent chance of a rate hike by March, and just above a 50 per cent chance by September.

The index of big manufacturers’ sentiment in the quarterly survey fell by four points to plus 19, below economists’ median forecast of plus 21 and matching a figure hit in September 2005.

The worsening sentiment among big manufacturers, the engine of Japan’s export-led growth, raised worries that a likely slowdown in the US economy in the wake of the credit crisis could deal a blow to Japan.

‘The weak figures reflect a worsening of the corporate business environment, such as a rise in oil prices and an expected decline in US gross domestic product,’ said Mr Mamoru Yamazaki, chief economist at RBS Securities.

The survey raises doubts about when or if strength in the corporate sector will spill over to households, a scenario that the BOJ relies on to justify raising rates.

‘The tankan showed firms are cautious, so it would be hard for the BOJ to raise rates at least during the first half of next year,’ said Mr Yoshimasa Maruyama, an economist at BNP Paribas.

‘We’re at the point where we cannot really pinpoint when the BOJ could raise rates.’

 

Source: REUTERS (The Straits Times 15 Dec 07)

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