Large Japanese firms' sentiment sharply improves for April-June

The business sentiment of large Japanese companies for the second quarter of 2013 sharply improved from the previous term on the back of higher stocks triggered by hopes of an export rebound fuelled by the yen's slide, a government survey showed Tuesday.

The confidence index covering firms capitalized at 1 billion yen or more came to 5.9 in the April-June quarter, up from 1.0 for the three months through March and hitting its highest level since the July-September period in 2011, according to the joint survey by the Finance Ministry and the Cabinet Office.

The results, however, are based on valid answers provided by 12,826 companies as of May 15, before financial markets began to fluctuate widely with skepticism sprouting over whether Prime Minister Shinzo Abe's economic stimulus can really shore up Japan's economy.

The index is calculated by subtracting the percentage of companies reporting deteriorating business conditions from those observing improvements.

Sentiment at large manufacturers jumped to 5.0 from minus 4.6 as Abe's policies dubbed "Abenomics," centering on bolder monetary easing and massive fiscal spending, pushed down the yen steeply, fanning expectations for recovery in exports, a key driver of growth, and driving up stock prices.

Nonmanufacturers' sentiment also rose to 6.4 from 4.0.

With the business mood improving, large and smaller companies in all industries plan to boost capital spending by 7.2 percent in fiscal 2013 above the previous year, the survey showed.

"The Japanese economy bottomed out last year and has been steadily recovering since the beginning of this year," said Shinichiro Kobayashi, a senior economist at Mitsubishi UFJ Research and Consulting Co.

Looking ahead, large firms expect business conditions to continue picking up over the next six months, with the index reading 14.0 for the July-September period and 11.5 for the October-December quarter.

Analysts noted, however, that the survey came before equity market turbulence began May 23, when the 225-issue Nikkei Stock Average tumbled 7 percent. The yen has also resumed moving upward recently, undermining hopes the world's third-largest economy will return to a full-fledged growth path, they said.

Deteriorating corporate and household sentiment means domestic demand may shrink, with firms reluctant to expand their businesses and consumers unwilling to spend against a backdrop of pessimism about the future of the economy, they added.

"If the (market) confusion is prolonged, it is inevitable that lower stock prices will worsen the (business) mood and the yen's appreciation could stifle exports, weighing on the economy," Yoshiki Shinke, chief economist at the Dai-ichi Life Research Institute said.

In April, the yen declined versus the U.S. dollar by 19.9 percent from a year earlier, with the Bank of Japan pledging to implement drastic credit easing steps to achieve a 2 percent inflation target within two years, the Finance Ministry said.

In the same month, the broader Topix index of all First Section issues on the Tokyo Stock Exchange was up 8.0 percent from the previous month on a monthly average basis, after increasing 7.0 percent in March, other government data showed.