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News Release

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

March 17, 2006

Business sentiment DI settling into pattern of steady improvement in "Actual Figures" and cautious "Forecasts"

The overall business sentiment diffusion index (DI) for March is set to show a steady improvement against a backdrop of decreasing pressure for structural adjustment, balanced growth of internal and external demand, and a lessening of the deflationary mood in the economy.

Among large companies in the manufacturing sector in particular, the improvement is likely to be fairly substantial, as the inventory cycle in the electronic components & devices sector has entered a "recovery" phase, the difficulty of passing costs on to sales prices is gradually being attenuated, and the yen has been weaker against foreign currencies than initially expected, among other reasons.

In the non-manufacturing sector, there is likely to be a reaction to the significant improvement recorded in December among small and medium-sized companies, but owing to firm domestic private sector demand, especially the fact that retail sales prices are bottoming out even on an existing store basis, among other factors, the general trend is one of improvement. On an all sizes of company basis, the business sentiment DI is heading for its first improvement since May 1992.

However, owing to the uncertainties listed below, the "Forecast" DI based on the period to June 2006 is likely remain somewhat cautious, as were the survey results obtained during 2005. We believe it is likely to be no higher than the "Actual Figures" for the period to March, or possibly slightly lower:
(i) The possibility that the US economy will see a slight deceleration, largely due to a slowdown of the growth in housing prices.
(ii) Fears that the price of crude oil will begin to rise once more, based on residual geopolitical risks and growth of demand from developing countries.
(iii) The need to ascertain the concrete effects of the bottoming out of market interest rates following the discontinuation of quantitative monetary easing.

Eventually, the business sentiment DI is likely to settle into a pattern of "cautious forecasts followed by upward revisions once actual figures are released.
With companies maintaining a cautious management stance, these circumstances suggest the possibility that the economic recovery will be long-lasting.

Capital investment plans for fiscal 2005 set to show strongest growth since fiscal 1991; "launch pad" for fiscal 2006 suggests investment likely to remain firm

Given the steady pace of economic recovery, capital investment for fiscal 2005 is likely to diverge very little from plans as of December 2005. On an all industries/all sizes of company basis, growth on fiscal 2004 is likely to be around +8.8% (including land, excluding software), the strongest growth recorded since fiscal 1991 (forecast as of February 1991: +8.7%; final actual figures: +10.8%).

In fiscal 2006, with the boost provided by major redevelopment projects in city centers tailing off and an increasing number of companies using mergers & acquisitions and overseas direct investment to expand their business, the pace of capital investment growth is likely to be a "launch pad", a little lower than in fiscal 2005 (down 3.2% as compared with fiscal 2005 on an all industries/all sizes of company basis; fiscal 2005 investment plans were down 2.2% in the March 2005 survey).

However, having completed a range of structural adjustments, enterprises have begun to adopt a more "aggressive" medium-to-long term approach to business management, and although crude oil prices are high, profits continue to rise and the corporate sector as a whole remains cash-rich. In the short term, therefore, the upward trend of capital investment itself is unlikely to falter.
After the beginning of fiscal 2006, it is likely that investment plans will be increased in much the same way that they have been since fiscal 2003, and that, in the end, overall investment will see a rise for the fourth year in succession.

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

Tel: 03-3288-4263
E-mail:ishikawa.makoto@jri.co.jp

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