Annual Survey of Corporate Behavior(Summary)FY2005(April 25,2006)

Background and purpose of the survey

The Japanese economy has come out of a temporary pause and is now recovering. Corporate profits are improving and capital investment is growing. On the other hand, however, soaring prices of oil and nonferrous metals are pushing up companies' purchase prices, causing concerns about deterioration in their earnings. In such circumstances, we decided to conduct for this year a "Questionnaire Survey on Corporate Behavior" to get a grasp on what strategies are being conceived and what kinds of risks watched out for by Japanese companies to continue growing in the future.

Working along the previous surveys, in respect of the business environment surrounding Japanese companies and their management policies this time we asked how they view the economic conditions, demand, foreign exchange rates, and purchase/sales prices, and how their capital investment, employment, and overseas production are at present and will be in the future (Chapter I); and asked how their sales and current profits will be, how they expect to boost sales, if they are over-stocked or short-stocked, what they derive competitiveness from, how they will be financed, how they will use profits earned and funds raised through operating activities, what risks they foresee, and which countries or regions will be more important to them than others (Chapter II "Current Situation of Profit and Related Items" and Chapter III "Future Corporate Strategy").

How survey was conducted

(1)Period of the research: January 2006.

(2)Survey items:

(i) Business environment and management policy;

(ii) Current situation of profit and related items;

(iii) Future Corporate Strategy;

(3)Coverage: corporations listed in the first and second sections of stock exchanges in Tokyo, Osaka and Nagoya (2,510 companies in total).

(4)Survey method: self-reporting mailing method using prescribed questionnaire.

(5)Responded by: 1,123 (594 of manufacturing sector and 529 of non-manufacturing sector).

(6)Response rate: 44.7%.

Main points of the survey results

  1. The survey conducted finds that companies expect higher real growth rates for both the national economy and industry-specific demand than the previous year's survey. The survey also shows they anticipate the highest growth of capital investment in the manufacturing industry since our FY1990 survey. The respondents also replied they will give top priority to capital investment in use of profits earned or funds raised over the next three years (FY2006-2008). As to the number of persons employed, they expect it to rise higher over the next three years after the rate of employment growth turned positive for the FY2003-2005 period. On the other remaining items, 80 percent of companies replied they are appropriately stocked while 70 percent answered they expect sales and current profit to increase over the next three years.

    Japanese companies are thus seen to have a positive medium-term outlook on the back of post- bubble negative legacies including excessive production capacity or employment having been generally disposed of.

    Companies forecast the yen one year from now (around January 2007) will be 113.2 yen to the dollar, which is stronger than the rate quoted in the month immediately preceding the survey. Given that export companies break even at 104.5 yen to the dollar, the current exchange rate, which is weaker than such break-even rate, is contributing to the earnings of export companies.

  1. Companies intend to pursue a strategy in the future aiming to continue growing through new product development, product differentiation, and expansion and strength of overseas production bases to meet local demand, among other things.

    First, as to products, they seek to boost sales by developing new products or differentiating products while generally maintaining current sales price levels, and expect to derive competitiveness from principally product quality, technological capabilities, and response to customer needs.

    As to financing, they give importance to borrowing from private financial institutions and internally accumulated funds made possible by improved profitability. With respect to the use of profits earned or funds raised, they lay greater weight on capital investment and dividend payments to shareholders, and less on reduction of interest-bearing debts. By industry, the manufacturing industry places emphasis on research and development while the non-manufacturing industry, on improvement of employee treatment.

    From the global perspective, the ratio of companies operating overseas production has been on the increase as has been the ratio of overseas production to overall production.

    As to the reasons for maintaining overseas production bases, the most give "to meet local product demand," more strongly noted in the basic materials industry. By region, similarly, "to meet local product demand" is the strongest reason among companies that give importance to the United States, the European Union and China. On the other hand,among those giving weight to countries other than the three, the most name "to secure good-quality and low-cost labor."

    The respondents also replied that China will be more important than the United States or the European Union over the next three years in all aspects relating to Japan's export markets, overseas production bases, and competitors in domestic or foreign markets. In foreseeing the Japanese economy, we should closely watch how the Chinese economy will continue develop in the future.

  1. Companies expect to grow over the next three years. Then, what risks will affect such expectation? About half of the respondents have given "risks deriving from price fluctuations on raw materials" as the most reply, worried that trends in oil prices and other raw materials will have impact on their business management. By industry, risks principally relating to product development strategy (success or failure in development of new products) are the most notable in the manufacturing industry while many of non-manufacturing industries have named compliance- related risks.


Questions about this survey can be made to HERE