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BOJ December Tankan Likely to Worsen Sharply

12/10/2012 | 08:56pm US/Eastern

--BOJ's December quarterly tankan is expected to show a sharp deterioration in sentiment among large manufacturers

--Impact of anti-Japan protests in China likely weighed on corporate sentiment

--Analysts expect BOJ to ease policy further if results as weak as expected

TOKYO--Japan's large manufacturers became significantly pessimistic about their business conditions in the three months to December as anti-Japan protests in China that heated up in September weighed on sentiment, the central bank's quarterly tankan survey is expected to show Friday.

The survey's headline diffusion index--which measures sentiment among large manufacturers--is expected to fall to minus 10 from minus 3 in the previous tankan in September, according to a median forecast of 16 economists. It would be the lowest reading since March 2010.

The index is calculated by subtracting the percentage of firms saying business conditions are bad from those saying they are good.

The expected deterioration is largely due to stalled business activities amid anti-Japan protests in China over a territorial dispute, as well as to the termination of government subsidies for fuel-efficient cars, analysts say.

The impact of the dispute wasn't fully reflected in the September tankan, as a majority of the companies responded to the survey before the outbreak of violent rallies in China in mid-September.

Many analysts expect that if the December tankan is as weak as expected, it will trigger another round of monetary loosening by the BOJ at its Dec. 19-20 meeting. The central bank is also feeling strong pressure from lawmakers, as monetary policy has become a major focal point in the campaign for Sunday's general elections.

"Since the BOJ doesn't want to be seen as bowing to political pressure, it will likely keep up appearances that a further deterioration in the economy, as indicated in the tankan, forces it to take additional easing steps," said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute.

Shinzo Abe, leader of the main opposition Liberal Democratic Party widely seen as returning to power, has urged the BOJ to implement "unlimited" easing to target 2% rises in prices. His comments have fueled market hopes for immediate BOJ action, lifting the dollar to as high as Y82.84 on Nov. 22.

Meanwhile, the tankan is likely to show that big companies plan to increase capital spending by 4.9% in the current fiscal year ending March 31, according to the economists' forecast. That is down from a 6.4% rise forecast in the previous survey.

Although business spending plans are usually revised upward in December surveys, they will likely show cuts this time due to slowing production and sluggish corporate profit prospects, analysts say.

Write to Megumi Fujikawa at megumi.fujikawa@dowjones.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

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