Boj Reveals Upbeat Business Confidence, Dollar Hit

A surprisingly upbeat survey of Japanese business confidence jolted Tokyo markets on Wednesday, fuelling speculation that the central bank may be closer than imagined to its first credit tightening since August 1990.

But while the Bank of Japans (BOJ) quarterly tankan survey painted a rosy picture for the nations nimble manufacturers, it also showed that other firms remained less optimistic a point noted by a central bank official.

That gap, many analysts say, means the central bank will likely wait for the recovery to broaden before raising rates.

The diffusion index for big manufacturers, a key gauge of business confidence in the tankan, rose to plus seven in June from plus two in March, when the previous survey was conducted.

 

The index was stronger than expected and caused a frenzy on financial markets, battering the dollar and bond prices but igniting a rally in Tokyo stocks. To say the report is an eye-popper is an understatement, said Jane Berryman, a senior analyst at Technical Data in Tokyo.

The tankan also forecast that the cheerful mood would persist, predicting that the major manufacturers index would rise to plus eight in September.

The March tankan had forecast a manufacturers diffusion index of minus one for June. Private economists forecasts had ranged from minus four to plus four and many market players were expecting sentiment to worsen.

The diffusion index for major non-manufacturers, meanwhile, slipped a bit to minus seven in June from minus six in March, while the index for small manufacturers improved marginally to minus seven from minus eight.

The index represents the percentage of companies which see business conditions as favourable minus the percentage of those viewing conditions as unfavourable.

Tokyo markets have been speculating over when the central bank would tighten its hyper-accommodative credit stance since early last year, but most economists had thought it would wait until at least October and possibly next year before moving.

The current easing cycle began in July 1991 when the official discount rate was cut to 5.50 percent from 6.0 percent and culminated in a 50 basis point cut to 0.5 percent in September 1995.

BOJ research chief Masayuki Matsushima told reporters the tankan showed a positive mechanism in the recovery, but added that it was tough to make an overall judgment on the economy based on the tankan alone.Another senior central banker warned against extrapolating from the makers improved sentiment to the whole economy.

I dont think we can say that the economic recovery has strengthened as much as the improvement in the major manufacturers diffusion index, he said.

Wednesdays numbers sent the dollar down more than one yen to a days low of 113.35 yen, toppled Japanese government bond prices and boosted the 225-Nikkei share average 1.66 percent to 20,679.27. But the greenback rebounded a bit later, helped by the BOJ officials cautious comment.

Economists said that while the tankan data showed big manufacturers were benefiting from robust overseas demand for their exports, the gap persists between nimble manufacturers and more sluggish non-manufacturing and smaller firms.

The Bank of Japan (BOJ) is going to want to see a broadening out of the recovery, said Jesper Koll, chief economist at JP Morgan in Tokyo.

It will take the September and December tankan...showing an improvement in the service sector and the small and medium-sized sector before they can seriously justify (a rate hike). I think the rate hike will come in exactly six months.

Susumu Kato, chief economist at BZW Securities, however, said the BOJ could raise rates in August or September.

I think todays tankan numbers suggest the April-June quarter slowdown in demand was just temporary, reflecting the (consumption) tax increase (in April) and...so it is quite reasonable to expect a rate hike in the July-September quarter, Kato said, adding however that the move was most likely in either August or September rather than July.