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

September 14, 2007

Business Sentiment DI likely to be weak overall

The Business Sentiment Diffusion Index (DI) in the Bank of Japan's Short-Term Economic Survey ("Tankan") for September is expected to indicate that the economy is sluggish.
Owing to the deceleration of the US economy, the slow growth of household demand, the rise in the cost of raw materials, and the instability of financial and capital markets at home and abroad, the DI is likely to see a continued gentle decline on an all sizes of company/all industries basis (falling for a third consecutive quarter according to the time series for current statistical standards that can be traced back to December 2006, or for a second consecutive quarter according to the long-term time series published by the Bank of Japan).

Among small and medium enterprises, the Tankan is likely to reveal relatively pessimistic business sentiment especially in industries that have not yet managed to escape from price competition and among companies that have not been able to achieve economies of scale in their procurement activities.

Moreover, given the risk of a dip in the US economy, the current political confusion in Japan and the likelihood that the volatility of domestic and overseas markets under these conditions will be prolonged, it is highly likely that the "Forecast DI" for the period to December will be cautious overall (the DI for all sizes of company and all industries is expected to fall by 2 points from its September level).

However, the level of the DI itself (all sized of company/all industries) is still in the positive range (during the "plateau" phase, it was just in the negative) and it is likely that the underlying stability of the economy will be maintained.
The fact that financial positions continue to improve, such as a rise in ratios of return on sales, and the fact that industrial production recovered in the July-September quarter, following the completion of inventory adjustments in the electronic components & devices sector, suggest that, among the larger manufacturing companies, the short-term decline in the DI will be a small one.

FY 2007 capital investment plans: investment growth set to continue although slowing

The September Tankan is likely to forecast growth of capital investment plans for fiscal 2007 of +3.5% (all sizes of company/all industries; including land, excluding software).

The fact that capital investment efficiency (ratio of operating profit to fixed assets) is still improving, the availability of plentiful money stocks and the fact that a further rise in demand can be expected from non-manufacturing industry (especially sectors such as electrical power, gas, distribution, and transportation), where the average age of capital equipment continues to rise, suggest that the upward trend of domestic capital investment itself will continue for some time.

However, owing to the possibility that export sectors will postpone capital investment in the face of the growing risk of a dip in the US economy, and the fact that small and medium enterprises, whose business sentiment remains weak, are thought to be taking an increasingly cautious stance on investment (thought to be the chief reason for the dip in investment recorded in the April-June quarter, the overall growth rate as of September is likely to be lower than that recorded for the last 2 years, and the increase on the growth rate as of June (+3.1%) is not likely to be large.

The final growth rate for fiscal 2007 will be within the positive range, but if uncertainty over the future trends of the US economy and of the financial and capital markets remains strong, in a climate that makes it difficult for small and medium enterprises to take a more positive stance on investment, it is possible that the final growth rate for fiscal 2007 will remain below 5%, as in the September survey.

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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