July 19, 2007 / 2:24 AM / 12 years ago

UPDATE 1-Japan manufacturers' confidence falls - Reuters Tankan

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By Shigeo Kodama

TOKYO, July 19 (Reuters) - Japanese manufacturers are less optimistic about business conditions, a Reuters survey showed on Thursday, as firms feel the pinch from rising raw material costs, but expectations of a rate increase next month remain intact.

The July edition of the Reuters Tankan poll showed confidence had slipped from a five-month high seen in June, but confidence among electric machinery makers and non-manufacturers rose, a sign that corporate-sector strength still underpins Japanese growth.

And the outlook indices, charting expectations for the next three months, rose to a three-month high for manufacturers.

“Inventory adjustment in the high-tech sector seems to have run its course and transport equipment makers’ sentiment is getting better, a sign that overall business confidence may improve ahead,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

“Unless U.S. subprime woes cause unexpected damage to the world economy, I think the next rate hike will come in August.”

The Reuters Tankan, a monthly survey of leading Japanese companies, produced a diffusion index of plus 28 for manufacturing firms in July. That was down from a five-month high of plus 31 in June.

WARM TIMES FOR RETAILERS

The index for non-manufacturers improved to plus 19 from plus 16 in June, as warm weather pushed up sales of summer items at some retailers.

The Reuters Tankan poll is designed to track the BOJ’s quarterly tankan business sentiment survey. The index is derived by subtracting the percentage of respondents who say business conditions are poor from the percentage who say they are good.

The BOJ’s June tankan showed that Japan’s big manufacturers remained upbeat about business conditions, with their DI matching the relatively high level marked three months earlier.

The next quarterly BOJ tankan survey is due on Oct. 1.

The central bank has kept monetary policy on hold since raising its key policy rate to 0.50 percent in February. This was the first rate hike since July last year, when it ended its super-loose monetary policy of keeping interest rates near zero.

Among manufacturers surveyed by Reuters, the index for the textile and paper sector fell 21 points from June to minus 10, the lowest level since October 2005.

The index for the oil refinery and ceramics industry fell 39 points to plus 17, the lowest since plus 10 was seen in March.

“Surging raw material and fuel costs, as well as the yen’s weakness, is hurting,” said one company in the textile and paper sector.

The yen has fallen to multi-year lows against other major currencies, which boosts exporters’ profits earned abroad but hurts importers by driving up prices of overseas products.

NEW PRODUCTS

The index for electric machinery makers, closely watched for clues on whether high-tech inventories are building up, rose two points from June to plus 42, its highest level since March.

“We’re being able to launch competitive new products as the global economy continues to expand,” one company in the electric machinery industry said.

Some analysts have worried that a slowdown in the U.S. economy, the main destination for Japan’s exports, could prevent a rebound in production.

Industrial output fell 0.3 percent in May, revised government data showed last week. But the data also showed that inventories fell 0.4 percent, easing worries that high-tech inventories continued to build up on slack sales.

Both manufacturers and non-manufacturers are upbeat about the future.

The manufacturers’ outlook index for the next three months stood at plus 36, up 8 points from their score for current conditions and matching a high marked in April.

The non-manufacturers’ outlook index was plus 25, up 6 points from their DI for current conditions and 4 points higher than in the previous month.

The Reuters tankan survey was conducted from June 28 to July 13, with responses from 250 of 400 manufacturers and non-manufacturers surveyed.

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