Japan's business morale slumps

AT THE BEGINNING of a crucial week for the Japanese economy, a key survey revealed yesterday that morale among businesses has slumped to its lowest level for four years.

But the quarterly tankan report, published by the Bank of Japan, was less dismal than expected and the results had the effect of boosting the stock exchange and easing pressure on the embattled yen.

Unsurprisingly - coming a fortnight after the government's first official acknowledgement that Japan has entered a recession - the BOJ's so-called "diffusion index" revealed the most pessimistic outlook since 1994. The index - the percentage of major manufacturers who are positive about business conditions, minus the proportion of those who are suffering hardship - sank to minus 38 in June, compared to minus 31 three months earlier.

Informal polls among economists in Tokyo had predicted a figure as low as minus 44 and, after the tankan's announcement early yesterday morning, the Nikkei Stock Average rose by 155.69 points to close at 15,365.73, a gain of 1 per cent.

The yen recovered from an early slide to trade at around 142 to the dollar in mid-afternoon, a little above its level at the end of last week. "The June figures are better than expected because executives expect the 17 trillion yen (pounds 72bn) stimulus plan to invigorate the economy," said Maki Fukushima, senior analyst with Nikko Research Centre in Tokyo.

The markets have also been cheered by the announcement on Friday that the troubled Long-Term Credit Bank (LTCB), whose share price sank to 50 yen last week, is to merge with Sumitomo Trust and Banking Corp.

The terms of the deal, which effectively amounts to a takeover of LTCB by Sumitomo, are still vague, but the agreement has succeeded in heading off a possible nightmare scenario - the bankruptcy of LTCB, potentially triggering further banking collapses.

On Thursday, the Policy Research Council of the ruling Liberal Democratic Party is due to come up with details of the "bridge bank" which will tackle the problem of bad loans, estimated to total 77 trillion yen. The new institution will be able to take over the assets of terminally ill banks and continue to provide loans to creditworthy borrowers who would otherwise face a credit crunch.

"A lot depends on the Thursday meeting," says a foreign finance official in Tokyo. "If they can clean up the bad loans in a decisive, confident move, that could bring the dollar back down and everything would become more comfortable. I think it will work, but I wish I was more confident."

The tankan survey revealed a sharp difference in confidence between small or medium-sized companies who face a grim future, and big firms which are looking forward to the effects of fiscal spending programmes promised by the Japanese government over the past few months.

Among smaller manufacturing companies, the BOJ recorded an index of minus 49, down from minus 38 in March and the lowest level since May 1975 at the height of the oil price shock. Among non-manufacturing companies the distinction was even more pronounced - morale among big firms actually rose from minus 30 to minus 28, while for smaller companies it fell from minus 37 to minus 42.

"The difference in business climate between major companies and smaller ones has become clearer," said Shosaku Murayama, the BOJ's head of research and statistics.

"The government's comprehensive economic stimulus measures have brought about positive impacts on the business confidence of the major companies, but smaller ones cannot have an optimistic view," said Mr Murayama.