Tankan Unexpected Rise

The Bank of Japan's widely-watched Tankan survey of business sentiment showed an unexpectedly sharp improvement in business sentiment in the September quarter as Japanese companies shrugged off worries over the prospect for the global economy. Japanese firms also increased their capital spending plans as well as their profit forecast for the current fiscal year ending in March 2007 amid solid domestic consumer spending, and a weak yen also expected to boost profit margins. The latest Tankan showed that the headline diffusion index for large manufacturers jumped to plus 24 in the September survery from 21 in June, the second straight quarter of improvement. The index level was also the highest since September 2004 when it stood at plus 26. The figure beat market's consensus forecast of plus 21, with forecasts ranging from plus 18 to plus 22. In the June Tankan survey, large manufacturers had predicted the diffusion index would come in at plus 22 in September. The index for large non-manufacturers was unchanged at 20 in the September poll compared to three months earlier. Among small companies, which employ majority of the Japanese workforce, the business sentiment index for manufacturers and non-manufacturers worsened due to concerns over profit margin amid higher procurement cost and bad weather which affected consumer spending. The sentiment index for small manufacturers came in at plus 6, down from plus 7 in June, while the index for small non-manufacturers fell to minus 8 from minus 6. That shows a majority of small service companies -- restaurants and bars, small retailers and construction firms -- was hit by the heavy rains during the summer. Going forward, large manufacturers and small non-manufacturers foresee a slight deterioration in business conditions over the next three months while large non-manufacturers and small manufacturers forecast an improvement. The firms surveyed assume the US dollar will average 111.64 yen in the year to March 2007, compared to the previous forecast of 111.09 in June. The BoJ said it recovered some 60 pct of replies to the questionnaires by Sept 15, four days after the benchmark Nikkei 225 index fell below the crucial 16,000-point level.