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A Forecast of the Bank of Japan's Short-Term Economic Survey ("Tankan")
(June Survey)

June 18, 2004

The latest edition of the Bank of Japan's Short-Term Economic Survey ("Tankan"), based on the June 2004 survey, which is due to be published on July 1, is likely to show continued economic recovery.

The business sentiment diffusion index for June is likely to show a slight improvement, up 4% points on the level recorded at the end of March on an all industries/all sizes of company basis. In the manufacturing sector, the continued growth of exports and the accelerating recovery of domestic demand suggest that the business sentiment diffusion index is likely to be adjusted upwards by 6% points as compared with the time of our last forecast. Thanks to the strong performance of the manufacturing sector and the recovery of construction investment and consumer spending, the index is also likely to see a slight improvement in the non-manufacturing sector.

On an all industries/all sizes of company basis, the Tankan's forecast of the amount of capital investment in fiscal 2004 is likely to rise for a second year, with an upward adjustment of 0.6% points. Capital investment should continue to rise in the general machinery and electrical machinery sectors against a backdrop of export growth, among other factors, and is also likely to see a recovery in the materials industry, under the influence of improving conditions in the goods markets, and sectors such as telecommunications and information services.

This quarter's Tankan may reveal deterioration in business performance in some industries, due to the rise in materials prices since the second half of 2003. However, given that, among other things, the rise in materials prices reflects the strength of global demand and is being driven by the following wind of a rise in sales, and the movement to pass on cost increases from upstream areas is spreading, the risk that the negative impact will worsen is slight. Looking to the future, unless the price of crude oil increases sharply for geopolitical reasons, the rising trend of revenues and profits is basically likely to hold firm.

1. Business Sentiment Diffusion Index

The actual figures for June on an all industries/all sizes of company basis are likely to be up 4% points on the previous survey (March), a slow but steady improvement. In spite of negative factors such as the rise in the prices of materials and the BSE crisis, the continued strength of overseas economies and the acceleration of the recovery of the domestic economy have contributed to an improvement in business confidence and the diffusion index is likely to see an upward revision of 5% points as compared with time of our last forecast.

In the manufacturing sector, although the improvement among major corporations is likely to be small (around 4% points), the index is set to begin rising among small and medium enterprises and, on an all sizes of company basis, the index is likely to resurface. The recovery is increasingly clear to see. Exports continue to grow and, on the domestic demand front, production of slimline TV sets, DVD recorders and other consumer electronics is expanding rapidly and orders for machinery, which had slumped in the January-March quarter have begun to rally. The rise in materials prices is exerting a downward pressure on revenues and profits. However, at least at the macro level, the benefits of the increase in sales volume are greater, and the negative impact on the business sentiment diffusion index will be limited. In the non-manufacturing sector, the index is likely to see an overall improvement thanks to the knock-on effects of increased production in the manufacturing sector, the increase in factory construction and firm demand for apartments in and around Tokyo and the upturn in consumer spending as income conditions have bottomed out and consumer confidence has recovered.

Looking ahead to September, the index is likely to fall slightly. However, this is due to the characteristics of the recovery, in which the markets have remained cautious with regard to the future, to fears of a rise in the prices of materials and crude oil, and to uncertainty over the future of the Chinese economy, and is not necessarily a sign of a sea change in the real economy.

2. Capital Investment Plans

On an all industries/all sizes of company basis, the amount of capital investment plans is likely to see an upward adjustment as compared with March, especially among small and medium enterprises, registering an increase of 0.6% for fiscal 2004 and rising for a second year.

In the manufacturing sector, in view of the continued recovery of overseas economies and growth of the digital consumer electronics market, the stance of the general machinery and electrical machinery sectors on capital investment is likely to remain positive and the improving conditions in the goods markets are likely to boost investment in capacity expansion in the materials industry. There are signs that the trend of transferring production activities to overseas bases is coming to an end and investment plans are likely to remain relatively firm in all industries and among all sizes of company.

In the non-manufacturing sector, too, investment plans are likely to remain firm overall. Although the tailing off of the replacement purchasing of trucks in the transportation sector is likely to lead to be a negative factor, the benefits of the strong performance of manufacturing industry should gradually be felt in non-manufacturing industry, and the economic pulling power of the telecommunications and information service industries, and other growth sectors, is likely to grow.

For more information on the content of this report, please contact
Hideki Matsumura
Economics Department, Economic Research Center, Domestic Economy Cluster

Tel: 03-3288-4524
E-mail:matsumura.hideki@jri.co.jp

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