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

Business sentiment DI set to remain largely unchanged

The overall current business sentiment diffusion index for June is likely to be slightly higher than the business outlook diffusion index (for the next 3 months) in March and also to show a slight improvement as compared with the overall diffusion index in March.

One reason to expect this small improvement in the diffusion index is that, with domestic demand holding firm, the anxious mood that had rapidly intensified this spring, particularly in the manufacturing sector, has abated to some degree.

In other words, the downturn in confidence revealed by the index for March was largely the result of a sharp swing in favor of caution in the manufacturing sector, prompted by the slowing of export growth and the rise of resource prices. However, in the manufacturing sector, the following three points suggest that, in the manufacturing sector, the anxiety has abated to some degree, and that this will have contributed to an improvement in the diffusion index for June:
(i) The fact that a series of early releases of new products in areas such as digital consumer electronics and personal computers (product launches normally taking place during the summer bonus season have this year been brought forward to Golden Week, a series of public holidays in late April and early May) has recently begun to have a positive impact on shipping trends.
(ii) The fact that inventory adjustments in the electronic devices sector, which have been a cause for concern since last year, are making steady progress. (iii) The fact that the rising trend of domestic capital investment is bolstering sales in related sectors.
In the non-manufacturing sector, besides points (i)-(iii) above, the surge in leisure spending during Golden Week, which was greater than in the average year and was also boosted by good weather, is likely to have had a beneficial impact on the diffusion index.

However, two points suggest that the improvement in the diffusion index is unlikely to persist:
(i) As overseas economies, especially those of the United States and China, are unlikely, in the short term, to see growth as rapid as that achieved in 2003-2004, export growth is unlikely to recover for some time.
(ii) As raising sales prices will take some time, the continued high level of resource prices is likely to exert downward pressure on corporate profitability.

For this reason, as compared with the business sentiment diffusion index for June, the diffusion index of business outlook up to September 2005 is likely to show a slight deterioration in the manufacturing sector, a slight improvement in the non-manufacturing sector and to be unchanged overall.

In summary, the trend of the business sentiment diffusion index revealed by the June survey is likely to confirm that the Japanese economy has been unable to escape from the "plateau phase" in which it has been since last autumn, and that it continues to waver, now advancing, now retreating.

Partly because they had died down, at least temporarily, by the end of April it is likely that the anti-Japanese demonstrations in China have had little direct impact on the diffusion index for June.

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