By: Dr. Mike Campbell
Japan may have been relegated to the world’s third largest economy, but it remains a vital component of the global economy. An influential survey which is sponsored by the Bank of Japan, the tankan survey, has revealed that confidence amongst businesses has fallen for the first time in almost two years.
The survey which involves 12000 businesses is an important tool for helping the bank to shape its monetary policy. It is regarded as an indicator for the nation’s economic health and for the last six quarters, it has indicated that business confidence was recovering after the worst of the global financial recession.
The most recent survey has shown that the business confidence index has fallen from 8 to 5. This index, reflecting the views of large manufacturers, is the difference between the percentage of companies expressing confidence in business conditions minus those that which are pessimistic about the current business outlook.
Whilst the reading is still positive, it has been taken as a sign that Japanese firms are bracing themselves for tougher times ahead. The Yen is still very strong against other major currencies, and notably the US Dollar since the US is its biggest trading partner. A high Yen makes Japanese exports more expensive in importing markets but also means that profits are lower for Japanese firms producing goods abroad when the proceeds are repatriated to Japan and then converted into Yen.
Japan continues to be dogged by deflation in which prices decline (gently) month after month. This suppresses demand in the domestic market since consumers wait as long as possible before making a purchase since the price will be lower. Japan is also struggling with record unemployment levels of 5% - although this level would be the envy of much of the developed world.