ECONOMIC CONFIDENCE AMONG JAPANESE SMES AND LARGE

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 003311

SENSITIVE
SIPDIS

E.O. 12958: DECL: 12/05/2018
TAGS: ECON EFIN PGOV JA
SUBJECT: ECONOMIC CONFIDENCE AMONG JAPANESE SMES AND LARGE
MANUFACTURERS DROPPING RAPIDLY

Classified By: Ambassador J. Thomas Schieffer for reasons 1.5 (b) and (
d).



1. (SBU) SUMMARY. Japanese large manufacturers and small and
medium-sized enterprises (SMEs) are rapidly losing confidence
in the economy. Large-scale manufacturers' business
sentiment, according to one source, fell to its lowest level
since 2002, while SME sentiment fell to its lowest level
since 1998. Compounding Japan's falling business outlook are
the negative numbers from the retail sector, which reported
its steepest sales drop in 15 years. These preliminary
figures suggest Japan's economy could be entering a steeper
economic downturn than government forecasts had suggested,
something exemplified by the transportation sector's extreme
pessimism and data suggesting SMEs technically entered a
recessionary business climate in July 2007. The official
bank of Japan "Tankan" numbers, which will be released
mid-December, should confirm the increasingly gloomy economic
prospects. END SUMMARY.

LARGE MANUFACTURERS' BUSINESS CONFIDENCE COLLAPSES
-------------- --------------


2. (SBU) Japanese large manufacturers' business confidence
collapsed based on a November economic research report. The
400 companies surveyed forecast their business activity will
further decline, and thus Japan's economic conditions are
likely to worsen over the next few quarters. The pessimism
was greatest in the auto and auto parts sector where the
sentiment index fell to -75, down 53 points. The overall
decline brought business confidence for large manufacturers
to its lowest level since May 2002. Business pessimism is
reflected in the 27.3% fall in domestic Japanese auto sales
for the month of November and Mitsui OSK's statement that
trans-Pacific and European shipping volumes began falling in
July 2007. According to Ministry of Economy, Trade and
Industry (METI) officials, the drop in demand in the auto
sector is unprecedented. Moreover, METI does not foresee an
end to the drop and the GOJ and the auto sector are seemingly
at a loss on how to respond.

SME BUSINESS CONFIDENCE CONTINUES ITS FALL
--------------


3. (SBU) Japan's small and medium-sized enterprises (SMEs),
according to the Tokyo Chamber of Commerce and Industry
(TCCI),entered a contractionary period as early as June

2007. SME business sentiment dropped steadily from -6 in
June 2007 to -44 in the October 2008 TCCI business confidence
survey. TCCI officials add the drop in SME business
confidence is nation-wide and that the impact of declining
business activity is felt more strongly outside the Kanto
region. The officials add that no SME sector is spared, with
service, manufacturing, sales, export oriented and
construction firms all feeling the negative impacts of a
slowing global economy.

CONSUMERS GROWING MORE PESSIMISTIC AS HOLIDAYS APPROACH
-------------- --------------


4. (SBU) Large, medium, and small enterprises see consumers
cutting consumption, which contributes to their declining
sentiment. The Japanese Department Store Association's
nation-wide sales data fell 6.8% in October, its steepest
fall in more than 15 years, and Japanese consumer sentiment
dropped to its lowest levels since the GOJ began keeping the
survey in 1982. Department stores in Japan are already
taking measures to prop-up sales, but only UniQlo, a discount
clothing retailer, is expecting good year-end sales ( 28% in
November). Japanese clothing (-6.8%),computer (-5%),
household appliance (-5%) and audio visual (-9%) retailers
all experienced steep sales declines in November and are not
optimistic about December and January sales -- a period that
accounts for nearly one-quarter of annual sales.


5. (C) Comment: Japan's economy is officially in a recession
for the first time since 2001. Real GDP contracted 0.4% in
the third quarter and the potential for positive GDP growth
in early 2009 is not good given that consumer spending and
exports are both in decline. Japan's political stalemate and
its inability to enact economic and fiscal stimulus measures,

TOKYO 00003311 002 OF 002


even though the LDP proposed 10 trillion yen in new spending
December 4, is not reassuring the business community or
Japanese consumers. The worsening economic conditions are
reflected in the falling support for the Aso Administration.
According to a Nikkei poll of December 1, support for the
current government stands at just 31%, down 17 points from
October as a result of numerous factors, including policy
(economic) miscues. End Comment.
SCHIEFFER