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Economy

BOJ's Tankan survey points to end of 'virtuous cycle'

A security officer stands guard outside the Bank of Japan headquarters in Tokyo, where cherry blossoms were beginning to open on March 31.

TOKYO -- The Bank of Japan's latest Tankan business sentiment survey has offered some fresh signs that the "virtuous cycle" touted by the central bank as a big prop for the economy is winding down.

     Economic slowdowns in key emerging countries and the yen's upturn against other major currencies have combined to pull down earnings of Japanese companies, especially manufacturers.

     The findings of the central bank's March survey, released Friday, show dark clouds gathering over the corporate earnings landscape, which has been bright for some time.

     The closely watched diffusion index of business conditions for big manufacturers dropped to 6, a decline of 6 points from the December survey.

     One important signal of the deteriorating business environment for Japanese manufacturers is the diffusion index measuring manufacturers' views about overseas supply and demand conditions for products. The index -- which subtracts the percentage of manufacturers that saw "excess supply" from that of respondents who described the situation as "excess demand" -- fell 2 points from the previous survey to minus 11.

     It represents the lowest reading since March 2013.

     That basically means overseas demand for Japanese products has fallen to a level before the BOJ and its then new governor, Haruhiko Kuroda, began an aggressive "new dimension" in monetary easing.

     The yen's upswing from the beginning of this year is also threatening to decimate the profits of exporters.

     Large manufacturers said they expect a 3.5% decline in their pretax profits for the fiscal year that ended Thursday, down by 6.6 points from their previous estimate, according to the survey results.

     It would be the first fall in their pretax profits in four years. 

     Large manufacturers also forecast a 1.9% drop in their pretax profits for fiscal 2016, which started on Friday.

     Large nonmanufacturing companies see slower growth in pretax profits for fiscal 2015 and a fall for fiscal 2016.

     Japan's economic recovery, engineered by Prime Minister Shinzo Abe's reflationary economic policy, known as Abenomics, has been driven mainly by surging corporate profits on the back of a weaker yen.

     The BOJ remains confident in the strength and durability of the recovery. Kuroda has said the mechanism that takes growing income and uses it to boost spending is still at work.

     But the weakening of overseas economies and the yen's strengthening have jogged some of the mechanism's cogs.

     This worsening of the business environment could discourage capital investments and wage hikes by companies that are now developing business plans for the new fiscal year.

     Corporate capital spending remained robust in fiscal 2015. Large companies estimated their investment on facilities and equipment in the year to have increased by 9.8% from the previous year. Even though the figure represents a 0.9-point fall from the previous survey, it is still the highest reading for a March Tankan since fiscal 2006, when the forecast was for 11.9% more spending on facilities and equipment.

     But major Japanese companies are planning to cut their collective capital budget by 0.9% for fiscal 2016.

     This means the past pattern of slashing capital spending in response to slowing overseas economies is holding up. 

(Nikkei)

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