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News Release

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

September 17, 2004

The latest edition of the Bank of Japan's Short-Term Economic Survey ("Tankan"), based on the September 2004 survey, which is due to be published on October 1, is likely to show continued economic recovery. However, it is also likely to show a slight slowing of the pace of recovery, and to be cautious in its outlook.

The business sentiment diffusion index for June is likely to show a 3% point improvement on the level recorded at the end of June, on an all industries/ all sizes of company basis. In the manufacturing sector, especially in materials-related industries, business confidence continues to recover on the strength of firm domestic and foreign demand. Thanks to the firm performance of the manufacturing sector and the recovery of construction investment and consumer spending, the index is also likely to see a steady improvement in the non-manufacturing sector. However, by the time of the December forecast, the index is likely to reflect growing caution in the manufacturing sector owing to uncertainty over the future of foreign economies, among other factors.

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 3.7% 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 in non-manufacturing industries such as telecommunications and information services.

As this quarter's Tankan is likely to show, the economic recovery has continued, but, at the same time, it is highly likely that uncertainty over the future will gradually spread. Looking at the movements of the real economy, export growth shows signs of slowing and the rise of inventory levels in the electronic components and devices industry means that the future is likely to bring production adjustments. Given that the economy is losing momentum, the government should keep to a minimum any policies in the year-end tax reforms and budget drafting process, that are likely to heighten the negative impact on economic activity.

For more information on the content of this report, please contact
Hideki Matsumura
Economics Department

Tel: 03-3288-4245

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