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News Release

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

December 03, 2004

The latest edition of the Bank of Japan's Short-Term Economic Survey ("Tankan"), based on the December 2004 survey, which is due to be published on December 15, is likely to confirm that the economy has entered an adjustment phase. However, the basic economic trend is holding steady and it is likely that a sharp fall in confidence will be avoided.

The business sentiment diffusion index for December is likely to show no change on the level recorded at the end of September, on an all industries/ all sizes of company basis. Among large companies in the manufacturing sector, against the backdrop of slower export growth and production adjustments in the electronic components and devices sector, among other factors, the index is likely to deteriorate for the first time in seven quarters. In the non-manufacturing sector, by contrast, steady levels of domestic construction investment and consumer spending suggest that the index will see a slight rise. Growing uncertainty over the future of both the domestic economy and overseas economies mean that that, by the time of the March forecast, both the manufacturing and the non-manufacturing sector are likely to be taking a more cautious stance.

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 increase for a second year, rising 4.0% points on fiscal 2003. In the manufacturing sector , the rise is likely to be substantial, and in the non-manufacturing sector, the trend of capital investment is also likely to move out of the bottoming-out stage and head towards recovery. However, some large companies in the manufacturing sector are beginning to postpone investment and the Tankan's forecast is likely to show that the pace of capital investment growth is slowing.

This quarter's Tankan is likely to show that the "economic recovery led by the corporate sector" that Japan has enjoyed until recently has reached a plateau. However, given (i) the continued growth of exports to Asia, (ii) the recovery of profitability and the alleviation of the problem of the three excesses in the corporate sector and (iii) steady consumer spending thanks to the bottoming out of incomes, among other factors, it is also likely to suggest that the economy is not in the midst of a continuous deterioration. It is likely to suggest that the economy is currently in a "temporary adjustment phase within a recovery trend", similar to that experienced in the second half of fiscal 2002 and that it will move out of that adjustment phase and see a gentle recovery in the second half of 2005.

Nevertheless, as the benefits being passed on from the corporate sector to the household sector through incomes are slight, it would be unwise to put excessive trust in the strength of the economy. The government, for its part, should keep to a minimum any policies 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
E-mail:matsumura.hideki@jri.co.jp

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