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News Release

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

September 16, 2005

Business sentiment DI set to show a slight upward trend

With the Japanese economy showing ever clearer signs of escaping from the "plateau" on which it has until recently been stuck, the overall business sentiment diffusion index, incorporating the business outlook diffusion index (for the 3 months to December 2005), is likely to show a slight upward trend.

A number of factors, including the fact that, in general, the completion of inventory adjustments in the electronic devices sector is now in sight, the growth of domestic capital investment, and a recovery in exports to China, are thought to have boosted the index for the manufacturing sector. The recent rise in share prices is also thought to have contributed an improvement in business confidence.
At the same time, negative factors such as the growth of inventories of production goods in the general goods sector and a rise in the prices of natural resources such as crude oil, have persisted.
Although the vast economic pulling power of the electronics sector means that the diffusion index for manufacturing industry as a whole is set to improve, it is likely that the pace of improvement will remain slow in the short term. The peak of the current economic growth phase, recorded in September 2004, is unlikely to be topped before the beginning of 2006.

In non-manufacturing industry, the diffusion index is likely to continue improving in the business-oriented sector (capital investment-related industries, enterprise-oriented services, etc.), but in the individual-oriented sector (individual-oriented services, retail), it is likely that there will be a reaction to the sharp rise recorded in June.
For this reason, the overall diffusion index for September is likely to remain on a par with that for June. The sharp rise in the diffusion index for the individual-oriented sector in the period leading up to June 2005 was largely due to the emergence of pent-up demand as anxiety over incomes and employment receded, and to a surge in leisure spending over this year's Golden Week [a period in late April-early May in which a number of public holidays are concentrated], during which people were able to take longer vacations than in the average year. However, following the rapid growth recorded in the first half of the year, there appears to have been a lull in consumer spending over the summer. It is highly likely that the diffusion index for September in the individual-oriented sector will record a temporary slowdown in the rate of improvement of consumer confidence, reflecting this lull.
However, as employment and income conditions continue to improve and domestic share prices are expected to reach a new high, it is likely that demand in the household sector will gradually grow firmer. As a result, it is likely that the business outlook diffusion index in non-manufacturing industry will begin to rise once more.

Capital investment plans for fiscal 2005 set to record sharp growth

With companies beginning to have a rough idea of when the adjustment of excess capacity and excessive debt is likely to be completed, capital investment is likely to record sharp growth in fiscal 2005 as a result of investment in additional capacity by non-manufacturing industry, the expansion of investment in research and product development by manufacturing industry, and the emergence of demand for the maintenance and replacement of existing equipment, which has remained pent up until now.

The rate of growth in the amount of capital investment plans recorded by the September survey (on an all industries/all sizes of company basis; including land but excluding software) is likely to be in the region of +8.0%. This will be the highest rate for plans as of September recorded since fiscal 1990. Given that the amount that small and medium enterprises plan to invest tends to be revised upwards with each successive survey, the final increase is highly likely to reach double figures.

For more information on the content of this report, please contact: Makoto Ishikawa the Japan Research Institute, Limited.

Tel: 03-3288-4263

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