Foreign Chambers in Japan Foreign Chambers in Japan (FCIJ) has been conducting Business Confidence surveys online twice a year since 2002 among foreign-affiliated companies in Japan.

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Foreign Chambers in JapanForeign Chambers in Japan

©2006 FCIJ & Finnish Chamber of Commerce in Japan

Slowing

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Business Confidence Survey – Fall 2006Business Confidence Survey Business Confidence Survey –– Fall 2006Fall 2006

FCIJ Business Confidence SurveyFall 2006

Including commentary by Dr William Schrade, Ph.D. Economics at Temple University Japan

Still Growing – but more moderatelyStill Growing – but more moderately

Survey idea and technical implementation by the Finnish Chamber of Commerce in Japan

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Executive SummaryExecutive Summary

The Foreign Chambers in Japan (FCIJ) has been conducting Business Confidence surveys online twice a year since 2002 among foreign-affiliated companies in Japan. The tenth survey was conducted between October 16 and 25, 2006, and received 378 valid responses.

The continuous optimistic mood in the Japanese economy was reflected in this survey, although the growth figures and estimates for both the economy and the companies’ performances were more moderate than in the previous survey in April 2006. On a scale from -2 (strong decline) to +2 (strong improvement), this survey’s forecast on the Japanese economy for the next six months had an overall index of +0.83 (compared to +1.09 in the April 2006 survey) and for the next 12 months, +0.91 (+1.12. April 2006).

Regarding their own performance, the companies reported and forecasted for the next six months further gains in sales and profitability, but on a 15% lower level than in the previous survey. The manufacturing industry especially has improved its business results and expects to do so even further in the coming six months.

Concerning the strategies of the foreign-affiliated companies in Japan, they continue to see Japan as a market with room to expand – 82% looking for further growth (same as in the April survey) and 16% expecting to sustain their current level. Only 2% reported that they plan to downsize and 0% (one company out of the surveyed 376) are considering withdrawing from the market.

The survey also asked the respondents to give their opinion about inflation/deflation in Japan within the next 12 months. 65% expected some inflation, 35% no change and the rest, 2% some deflation.

The second new question in this survey was the percent of employees are permanent employees. The survey shows that foreign-affiliated companies to a much lesser extent use temporary employees than their Japanese counterparts. 73% reported that 70-100% of their employees are permanent, 15% that 50-70% are. The average was 76.6% permanent employees.

The next survey will be conducted in April 2007.

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The Foreign Chambers in Japan (FCIJ) is an informal organization comprised of foreign chambers of commerce and business groups in Japan mainly for the purpose of information exchange and enhancement of the activities of the component organizations.

The FCIJ conducted its first Business Confidence survey in April 2002, based on a format developed by the Finnish Chamber of Commerce in Japan (FCCJ). This survey, conducted twice a year, is rapidly becoming a barometer of foreign business in Japan.

The survey is headed by a task force consisting of representatives from the ACCJ, BCCJ, CCCJ, and FCCJ. It is run and processed on behalf of all the chambers by the FCCJ.

About the Foreign Chambers in Japan (FCIJ)About the Foreign Chambers in Japan (FCIJ)

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About the SurveyAbout the Survey

Survey period October 16– 25, 2006

Survey questions 2 questions on economy4 on company performance1 on reasons behind changes1 on strategies in Japan1 on inflation/deflation1 on rate of permanent employeesCompany profileContact information

Survey method online only

Survey population 2,150 companies

Notes

One main objective of the survey is to be simple to understand and easy to complete.

Providing contact information is optional to encourage as many individuals as possible to submit the form without privacy concerns. However, 72% gave contact information in the latest survey.

Although all questions were marked compulsory in the survey, we did not apply any error checking in the online form so as not to discourage respondents with messages like “You forgot to fill in question 2, please go back to the form.” Because of this, each question does not have the same number of responses.

Purpose of the survey

1. Provide chambers with significant trend information on the foreign and foreign-affiliated business community’s business outlook and outlook on the current state of the Japanese economy, noting challenges and the context of current market trends;

2. Reveal how foreign companies view the Japanese market;

3. Enable comparisons between the sentiments of participating chambers and between North American and European companies; and

4. Obtain reliable data on how foreign and foreign-affiliated businesses perform in Japan to dispel misconceptions about Japan in the home countries of the chamber members.

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Participating OrganizationsParticipating Organizations

The Italian Chamber of Commerce in Japan

The American Chamber of Commerce in Japan

The Swiss Chamber of Commerce and Industry in Japan

The Swedish Chamber of Commerce and Industry in Japan

The Finnish Chamber of Commerce in Japan

The German Chamber of Commerce and Industry in Japan

The British Chamber of Commerce in Japan

Japan-Ireland Economic Association

The Norwegian Chamber of Commerce in Japan

The Danish Chamber of Commerce in Japan

The Australia-New Zealand Chamber of Commerce in Japan

The Canadian Chamber of Commerce in Japan

The Austrian Business Council

The Netherlands Chamber of Commerce in Japan

The Brazilian Chamber of Commerce in Japan

The Belgium-Luxembourg Chamber of Commerce in Japan

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Brazil

1%Europe

55%

North America

35%

Oceania

9%

Total number of responses: 378 Response rate: 17%Total number of responses: 378 Response rate: 17%

Survey ResponsesSurvey ResponsesSurvey Responses

Shares of total responses - by areaShares of total responses - by area

American Chamber 120German Chamber 45Australia & NZ Chamber 34British Chamber 32Danish Chamber 22

American Chamber 120German Chamber 45Australia & NZ Chamber 34British Chamber 32Danish Chamber 22

Finnish Chamber 18Norwegian Chamber 15Swedish Chamber 15Austrian Business Council 15Others 61

Finnish Chamber 18Norwegian Chamber 15Swedish Chamber 15Austrian Business Council 15Others 61

Largest number of responsesLargest number of responses

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Sales & Trading

40%

Finance

9%

Manufacturing

9%

Service

33%

Other

9%

-10

24%

11-50

31%51-100

10%

501-

16%

101-500

19%

-5

17%

6-10

19%

11-20

26%

21-

38%

Type of businessType of business

Company DemographicsCompany DemographicsCompany Demographics

A typical respondent company

has been in Japan for 19 years, has 43 employees and is involved in sales andtrading industry

A typical respondent company

has been in Japan for 19 years, has 43 employees and is involved in sales andtrading industry

Number of employeesNumber of employees

Years in JapanYears in Japan

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1.1. Japan's economic situation (next 6 months)

1.2. Japan's economic situation (next 12 months)

2.1. Sales during the past 6 months

2.2. Sales during the next 6 months

3.1. Profitability during the past 6 months

3.2. Profitability during the next 6 months

4. Reasons behind changes

5. Strategies in Japan

6. Inflation/deflation in Japan

7. Rate of permanent employees

8. Comments

Survey Analysis MethodsSurvey Analysis MethodsSurvey Analysis Methods

Legend

A. Strong improvement = +2

B. Some improvement = +1

C. No change = 0

D. Some decline = - 1

E. Strong decline = - 2

The index makes it possible to compare results from consecutive surveys and to create graphs on how the sentiments change over time.

Profitability

Economy

Sales

03/2 04/1 04/2 05/1 05/2

EXAMPLE

+2

+1

0

-1

-2

Survey period

INDEX=(An*2+Bn*1+Dn*–1+En*-2)/TOTAL

Questions

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0 25 50 75

Response Number Percent

Strong improvement 15 7 %

Some improvement 134 66 %

No change 52 25 %

Some decline 2 1 %

Strong decline 0 0 %

Number of responses: 203

TOTAL FOR SURVEY

1.1. Japan's economic situation for the next 6 months1.1. Japan's economic situation for the next 6 months




No change 81 22 %

Some decline 6 2 %


Total number of responses: 364

INDEX +0.83 (previous survey+1.09)

0 25 50 75

European companies +0.80 (+1.07)Response Number Percent



No change 23 19 %

Some decline 2 2 %



North American companies

0 25 50 75

+0.89 (+1.11)

Compared to previous surveysCompared to previous surveys06/2 +0.83

06/1 +1.09

05/2 +0.82

05/1 +0.30

04/2 +0.68

04/1 +0.92

03/2 +0.68

03/1 -0.32

02/2 -0.42

02/1 -0.18

Australia/New Zealand: +0.79

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1.1. Japan's economic situation for the next 6 months (2)1.1. Japan's economic situation for the next 6 months (2)

0 25 50 75 0 25 50 75

0 25 50 75

Service +0.92 (+1.14)

Sales & Trading Manufacturing+0.75 (+1.03) +0.82 (+1.05)

By type of business OVERALL INDEX +0.83




No change 46 31 %

Some decline 1 1 %


Number of responses : 147




No change 7 21 %

Some decline 0 0 %






No change 16 13 %

Some decline 4 3 %


Number of responses: 1270 25 50 75

Finance +0.97 (+1.31)Response Number Percent



No change 5 14 %

Some decline 0 0 %



NOTES: Notable changes Highest-lowest

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0 25 50 75

TOTAL FOR SURVEY

1.2. Japan's economic situation for the next 12 months1.2. Japan's economic situation for the next 12 months




No change 37 10%

Some decline 19 5 %



INDEX +0.91 (+1.12)

0 25 50 75

European companiesResponse Number Percent



No change 25 12%

Some decline 14 7 %



+0.83 (+1.09)Response Number Percent



No change 10 8 %

Some decline 5 4 %



North American companies +0.98 (+1.16)

0 25 50 75


06/1 +1.12

05/2 +0.95

05/1 +0.57

04/2 +0.75

04/1 +1.03

03/2 +0.84

03/1 -0.06

02/2 -0.03

02/1 +0.21


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0 25 50 75 0 25 50 75

0 25 50 75 0 25 50 75

Finance Service+1.09 (+1.34) +0.98 (+1.05)

Sales & Trading Manufacturing+0.78 (+1.13) +0.91 (+1.12)Response Number Percent



No change 22 15 %

Some decline 12 8 %






No change 2 6 %

Some decline 1 3 %






No change 3 9 %

Some decline 1 3 %






No change 8 6 %

Some decline 6 5 %



1.2. Japan's economic situation for the next 12 months (2)1.2. Japan's economic situation for the next 12 months (2)


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0 25 50 75

TOTAL FOR SURVEY




No change 82 22 %

Some decline 37 10 %



North American companies+0.74 (+0.82)




No change 35 28 %

Some decline 9 7 %


Number of responses: 124 0 25 50 75

European companies +0.86 (+0.89)




No change 43 21 %




INDEX +0.78 (+0.86)

2.1. Sales during the past 6 months2.1. Sales during the past 6 months


06/1 +0.86

05/2 +0.67

05/1 +0.86

04/2 +0.75

04/1 +0.80

03/2 +0.55

03/1 +0.41

02/2 +0.21

02/1 +0.22


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2.1. Sales during the past 6 months (2)2.1. Sales during the past 6 months (2)

0 25 50 75 0 25 50 75

0 25 50 75 0 25 50 75

Finance Service

Sales & Trading ManufacturingResponse Number Percent



No change 27 18 %







No change 6 18 %

Some decline 1 3 %






No change 5 14 %

Some decline 5 14 %






No change 33 26 %

Some decline 9 7 %




+0.80 (+0.87) +1.15 (+0.79)

+0.69 (+0.98) +0.74 (+0.94)

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0 25 50 75

TOTAL FOR SURVEY

2.2. Sales during the next 6 months2.2. Sales during the next 6 months




No change 65 18 %

Some decline 22 6 %



0 25 50 75





No change 22 18 %

Some decline 8 6 %







No change 34 16 %

Some decline 9 4 %



INDEX +0.98 (+1.07)


06/1 +1.07

05/2 +0.94

05/1 +0.94

04/2 +0.98

04/1 +1.01

03/2 +0.86

03/1 +0.66

02/2 +0.61

02/1 +0.78


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No change 5 15 %

Some decline 0 0 %


Number of responses: 340 25 50 75 0 25 50 75

0 25 50 75 0 25 50 75

Finance Service




No change 28 19 %

Some decline 9 6 %






No change 2 6 %

Some decline 4 12 %






No change 20 16 %

Some decline 8 7 %




2.2. Sales during the next 6 months (2)2.2. Sales during the next 6 months (2)

+1.12 (+1.00)+0.88 (+1.01)

+1.06 (+1.20) +1.00 (+1.08)

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0 25 50 75


06/1 +0.72

05/2 +0.53

05/1 +0.67

04/2 +0.57

04/1 +0.54

03/2 +0.39

03/1 +0.29

02/2 +0.17

02/1 +0.14

TOTAL FOR SURVEY

3.1. Profitability during the past 6 months3.1. Profitability during the past 6 months




No change 89 24 %




0 25 50 75





No change 36 29 %








No change 46 22 %




INDEX +0.62 (+0.72)


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0 25 50 75 0 25 50 75

0 25 50 75 0 25 50 75

Finance Service




No change 31 21 %







No change 7 21 %

Some decline 4 12 %






No change 3 9 %

Some decline 5 15 %






No change 35 29 %

Some decline 19 8 %




3.1. Profitability during the past 6 months (2)3.1. Profitability during the past 6 months (2)

+0.54 (+0.69)

+0.91 (+1.02) +0.70 (+0.84)

+0.82 (+0.41)

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0 25 50 75

TOTAL FOR SURVEY

3.2. Profitability during the next 6 months3.2. Profitability during the next 6 months




No change 77 21 %

Some decline 33 9 %



0 25 50 75





No change 23 18 %




INDEX +0.80 (+0.91)

0 25 50 75





No change 43 21 %

Some decline 16 8 %



06/2 +0.80

06/1 +0.91 05/2 +0.79

05/1 +0.77

04/2 +0.76

04/1 +0.82

03/2 +0.72

03/1 +0.55

02/2 +0.50

02/1 +0.61

Compared to previous surveysCompared to previous surveys


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0 25 50 75 0 25 50 75

0 25 50 75 0 25 50 75

Finance Service




No change 34 24 %







No change 5 15 %

Some decline 2 6 %






No change 5 16 %

Some decline 2 6 %






No change 22 19 %

Some decline 8 7 %




3.2. Profitability during the next 6 months (2)3.2. Profitability during the next 6 months (2)

+0.85 (+0.73)+0.64 (+0.77)

+0.88 (+1.28) +0.92 (+0.99)

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A Comparison (1)A Comparison (1)

Sales and Economy

Conclusions:

(1) The companies’ views on the economy and their sales forecasts go hand-in-hand.

(2) The sales result during the past 6 months missed the forecast 6 months ago (0.78 vs. 1.07)

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

Apr 02 Oct 02 Apr 03 Oct 03 Apr 04 Oct 04 Apr 05 Oct 05 Apr 06 Oct 06 Apr-07

Sales Forecast (6 months)

Sales Result (past 6 months)

Economy next 6 months

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Profitability and Economy

Conclusions:

(1) Changes in profitability are smaller than changes in sales and views on economy.

(2) The reported result on profitability missed the forecast (0.62 vs. 0.91).

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

Apr 02 Oct 02 Apr 03 Oct 03 Apr 04 Oct 04 Apr 05 Oct 05 Apr 06 Oct 06 Apr-07

Prof. Forecast (6 months)

Prof. Result (past 6 months)

Economy next 6 months

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Economy, Sales and Profitability by Business


0

0.2

0.4

0.6

0.8

1

1.2

1.4

1/02

2/02

1/03

2/03

1/04

2/04

1/05

2/05

1/06

2/06

Economy next 6 months Sales next 6 months Profitability next 6 months

Surveys:

1/02=Spring‘02, 2/02=Fall‘02, 1/03=Spring‘03, 2/03=Fall‘03, 1/04=Spring‘04, 2/04=Fall‘04 , 1/05=Spring’05, 2/05=Fall’05, 1/06=Spring’06 , 2/06=Fall’06 (current)

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1/02

2/02

1/032/

03

1/04

2/04

1/052/

05

1/06

2/06

-1

-0.5

0

0.5

1

1.5

1/02

2/02

1/03

2/03

1/04

2/04

1/05

2/05

1/06

2/06

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0 25 50 75

Some comments from respondents (for all comments, see website)

� Expanding headcount strongly to meet growing demand for financial services.

� Built a new building in the last six months and will complete three new buildings in the next six months.

� Retail pressure to reduce costs to them

� Our revenue and profitability expectations should be better, but the tight labor market tempers them.

� Change of strategy and infusion of new talent.

� Results are a combination of our efforts and improving business environment

� More focused sales teams, reduced costs, additional product lines.

� General global economic confidence is on the rise leading to IT investment.

� A change in regulations reduced our competition

4. Reasons behind the changes in business performance4. Reasons behind the changes in business performance


Own efforts 210 57 %

More/less resources 41 11 %

Exchange rates 23 6 %

Competition change 50 14 %

Other 46 12 %


Previous surveys

02/1 02/2 03/1 03/2 04/1 04/2 05/1 05/2 06/1

51% 52% 54% 54% 57% 56% 60% 54% 62%

4% 8% 9% 9% 7% 7% 8% 11% 7%

5% 7% 5% 6% 4% 9% 4% 6% 4%

19% 16% 14% 12% 12% 12% 12% 13% 13%

20% 17% 18% 19% 20% 16% 16% 16% 15%

Previous surveys

02/1 02/2 03/1 03/2 04/1 04/2 05/1 05/2 06/1

51% 52% 54% 54% 57% 56% 60% 54% 62%

4% 8% 9% 9% 7% 7% 8% 11% 7%

5% 7% 5% 6% 4% 9% 4% 6% 4%

19% 16% 14% 12% 12% 12% 12% 13% 13%

20% 17% 18% 19% 20% 16% 16% 16% 15%

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� Risk appetite among Japanese investors is increasing. We need to focus on other investment products than we have

during the past two years (mostly 'safe' products). It will take some time to plant seeds and then harvest.

� Improved access for foreign suppliers to Japanese customers in certain industry areas (out -> in) as a result of

globalization of Japanese industries (in -> out)

� China's growth have very positive impact on our Japanese costumer activity. Specific segments are growing (aerospace)

in a tight supply situation.

� In the past 6 months we cut the expenses, which explain our better results. In the next 6 months we are going to spend

more to develop new products for Japan which explains the decrease in profitability.

� Our core market has been growing during last period giving us a lot of opportunities. This together with own focus and

efforts giving us significantly growth

� Exchange rate of Euro is counterproductive!

� Exchange rates increase our cost of imports. We are investing in our own organization, leading to higher costs in FY '06

which will yield tangible benefits is '07 and '08

� We are moving more resources on this business and respect the special requirements of the market in our headquarters!

� Aggressive investment to Japan as the market is expanding.

� Stronger consumer confidence and demand

� Shortage of skilled IT labor. Many companies chasing the same shrinking pool of people.

� Japanese economy became friendly. Subsequently work came from Japanese client companies especially in domestic

market.

� Our own efforts, plus due to improved economic situation, there are more companies now interested in Japan, and they

are examining and re-examining the market, which is good for a market research company such as ours.

4. Reasons behind the changes – comments (2)4. Reasons behind the changes – comments (2)

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0 25 50 75

TOTAL FOR SURVEY

5. Strategies in Japan5. Strategies in Japan


Growth 309 82 %

Sustain current 59 16 %

Downsizing 6 2 %

Consider withdrawal 1 0 %


0 25 50 75

European companies


Growth 173 83 %


Downsizing 5 2 %



Previous surveys

02/1 02/2 03/1 03/2 04/1 04/2 05/1 05/2 06/1

77% 72% 70% 72% 80% 75% 82% 79% 82%

20% 22% 26% 27% 20% 21% 17% 17% 14%

3% 5% 3% 2% 0% 2% 1% 3% 2%

0% 0% 0% 0% 0% 1% 0% 0% 1%

Previous surveys

02/1 02/2 03/1 03/2 04/1 04/2 05/1 05/2 06/1

77% 72% 70% 72% 80% 75% 82% 79% 82%

20% 22% 26% 27% 20% 21% 17% 17% 14%

3% 5% 3% 2% 0% 2% 1% 3% 2%

0% 0% 0% 0% 0% 1% 0% 0% 1%

0 25 50 75

North American companies


Growth 110 88 %


Downsizing 0 0 %



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� Japan is our Companies number one global market and success here is key to our overall result for stake holders.

� Adjust sales strategy to changing market trends. Rethink present sales network. Introduce new products.

� Aiming for profitable revenue growth in a large, flat and fragmented market. This may entail acquisition(s) in

addition to organic growth.

� As a global supplier we want to develop OEM business to supply global Japanese transplants ( EU,US,CN)

� Associating with the projects in foreign countries would help our growth.

� Benefit from increased renewal investments of Japanese car manufacturers, stay ahead of increasing competition

in the Japanese market for our products.

� Both own efforts and M&A opportunities

� Depends on market changes we seek growth and will add capacity where we can

� Diversify supply sources and strengthen business relationships with existing customers for organic growth.

Positioning with leaders in the retail sector (particularly Aeon Group) and enhancing competitive advantage in

food safety systems.

� Fairly mature markets for most of our products, but we are still seeking growth.

� Focus on new raw electronics materials development.

� Foreign investment opportunities are effectively zero due to political interference and subsidized agricultural

production.

� Further strengthening of service through infrastructure investments, additional staff, training and new

service/products,

� If our business in Japan continues to strengthen for another year, then we shall expand our operations.

5. Strategies in Japan - Comments5. Strategies in Japan - Comments(All comments are available on the website)

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5. Strategies in Japan – Comments (2)5. Strategies in Japan – Comments (2)

� Main focus is on profitability. Low exchange rate is a concern especially against the Euro.

� Maintaining and increasing trust of customers, service, always being at the edge of quality and price.

� Most extra sales will come from overseas customers. Also, some business will be lost as our operations

overseas localize due to customer pressure or transport cost increases.

� Our certification services are targeted at companies outside of Japan exporting organic ingredients to Japan

and companies in Japan looking to add value to those ingredients. It has taken several years for JAS law to

be widely understood inside and outside Japan. I believe we are now seeing the real potential of the market.

� Participation in the Japanese automotive industry is obligatory for a global supplier

� Since the industry has been streamlined, we need to have growth and expansion plan for the survival.

� Taking share from competitors

� We are currently looking at entering a number of new segments, focusing on exports due to the current

position of the yen.

� We do not see any remarkable demand growth of our product in Japan but it is still major consuming country.

� We have only recently slid into the automotive industry, so we are learning as a company how to deal with

this demanding and temperamental customer. I.e. lower price, smaller machines are just two of the

requirements in the Japanese auto industry.

� We intend to consolidate our position with approx. the same level of staffing; however increase client base

and sales through more effective working practices

� We opened Osaka office to expand the business chance more.

� We use our office as a base for expansion on the Asian market

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Strong inflation 0 0 %

Some inflation 129 62 %

No change 74 35 %

Some deflation 6 3 %

Strong deflation 0 0 %


6. Inflation or deflation?6. Inflation or deflation?

TOTAL FOR SURVEY

0 25 50 75




No change 133 35 %




0 25 50 75

North American companiesResponse Number Percent



No change 46 36 %




European companies

0 25 50 75

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0% – 10% 8 4 %

10% – 30% 2 1 %

30% – 50% 7 3 %

50% - 70 % 27 13 %

70% - 100% 166 79 %


7. The rate of permanent employees? 7. The rate of permanent employees?

TOTAL FOR SURVEY

0 25 50 75


0% – 10% 14 4 %

10% – 30% 10 3 %

30% – 50% 19 5 %

50% - 70 % 58 15 %

70% - 100% 275 73 %


0 25 50 75

North American companiesResponse Number Percent

0% – 10% 1 1 %

10% – 30% 5 4 %

30% – 50% 9 7 %

50% - 70 % 25 20 %

70% - 100% 87 69 %


European companies

0 25 50 75

Average: 76.6 %

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General Verbal CommentsGeneral Verbal Comments

� Nothing. There are no trade barriers in Japan. Those who are complaining are not struggling enough

� Japan’s regulatory system remains incredibly opaque. Far too much bureaucracy, paperwork, regulation, and tax.

� As an import business weak yen continues to reduce our competitiveness.

� Breaking down the barriers faced by non-domestic companies is proving to be our biggest challenge

� Buy Japanese remains very strong effect in domestic rail business

� Concerns re LDP plans to increase consumption tax after next election - to 10% or more?

� Euro is far too strong/JPY weak for a fast growth and profitable business in Japan! European products are not

price competitive.

� How can parallel importing be combated? This is costing brand owners a fortune and is having an overall

detrimental effect on the market.

� A change in the local/international market mix (mostly US & Europe) from approx 60:40 to 40:60 has been

identified.

� Any information regarding business society shall be helpful.

� HR issues

� Japan needs more money for her healthcare system.

� Labor laws, recruiting trend, MITI-type activities led by government

(All comments are available on the website)

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General Verbal Comments (2)General Verbal Comments (2)

� Market access is hindered by high duties and various subsidies. Japanese consumers are expected to support

artificially high prices for agricultural products which is now negatively impacting consumer demand which is

hurting the industry the duties are trying to protect.

� No changes i.e. strongly regulated market.

� Our industry is facing a regulatory overkill in the aftermath of a number of "scandals" caused by our domestic

competitors

� Recruiting of competent managers and staff is a major headache for us.

� Regulations are thoroughly reviewed and implement severly. Some raw materials and finished products will be

difficult to get or sell.

� Tax are on the rise not helping small to medium businesses Labor law rules still antiquated, not suitable for

Consulting Business

� The generally growing trend for life cycle valuation of products and systems is strongly working in our favor

� We are annoyed by the high handling fees charged by major Japanese banks, regardless whether a remittance

is made or received. UFJ for example charges Yen 4,000 for Yen remittances from overseas (Yen 2500 plus

1500 -- because they cannot earn a fee on currency exchange rates as for remittances in Euro or US$).

� Would be interested in a session on how recent changes in the tax code impact small business.

� Yen is undervalued which makes goods manufactured in GBP less competitive

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SummarySummary

Economy in the next 6 months: continued improvement expected

� The views on the economic outlook in Japan for the next 6 months represents a growth forecast that is lower than in the previous survey (April 2006) – the index is now +0.83 compared to +1.09 in the Spring survey. Seventy-seven percent expect strong or some improvement while 22% expect no change.

� North American affiliates show more optimism than European (+0.89 vs. +0.80).

� By type of business, the finance sector is now most optimistic (+0.97) while the sales & trading sector is least optimistic (+0.75).

Economy in the next 12 months: even stronger growth in the longer term

� The index for the next 12 months is +0.91 (compared to +1.12 in the previous survey), i.e. the growth estimate is slightly more positive in the longer term.

� Here, the North Americans (+0.98) see the economic development more favorably than the Europeans (+0.83). The Australia/New Zealand (ANZ) companies had the brightest view, +1.03.

� By type of business, the finance sector (+1.09) was again most optimistic. The service sector was least optimistic (+0.78).

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Summary (2)Summary (2)

Sales Performance

Past 6 months…

� Index for the April 2006 survey was +0.86, while this survey indicates +0.78, i.e. a minor

decrease in the growth rate.

� The European affiliates reported a better sales performance (+0.86) than the North

Americans (+0.74). ANZ affiliates were far lower with +0.48.

� By sector, the best increase in sales comes from Manufacturing (+1.15) and Finance

reported the lowest increase at +0.69. In the previous survey it was just the opposite.

Next 6 months…

� Looking ahead, respondents continue to forecast a slightly slower improvement in sales, with an index of +0.98, compared to +1.07 in the Spring survey. Only 6% expect some decline, and none strong decline.

� The Europeans forecast a stronger improvement (+1.04) than the North American affiliates (+0.98). ANZ companies reported again the lowest, +0.76.

� By sector, there was a range from Manufacturing at +1.12 to Sales & Trading at +0.88.

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Profitability, the past 6 months…

� Also the profitability forecast decreased from the previous survey (+0.62 vs. +0.72).

� North American and European affiliates reported almost the same performance (+0.54 vs.

+0.67) and ANZ trailing at +0.33.

� By sector, Finance had best improvement with +0.91, with Sales & Trading lowest at +0.54.

And the coming six months?

� Profitability is expected to improve at a lower rate than in the Fall survey (now +0.80 vs.

+0.91 in the Spring); 70% of the respondents forecast strong or some improvement in

profitability; only 9% some decline.

� European (+0.84) and North American (+0.82) are more positive than ANZ affiliates (0.73).

� By sector, Service predicts the strongest growth (+0.92). Sales & Trading reports the slowest

growth (+0.64).

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Strategies in Japan

� Respondents continue to see Japan as a market with room to expand —82% looking for further growth (same as in the Spring survey) and 16% expecting to sustain their current level. Only 2% reported that they plan to downsize and 0% is considering withdrawing from the market.

� Notable is that the ANZ companies were also here a bit less optimistic, with 65% aiming for further growth and 32% maintaining current level.

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Commentary by Dr. William SchradeCommentary by Dr. William Schrade

It is not surprising that this survey’s index points to a downturn in the growth rate. Two reasons stand out. The first is the last survey occurred after the dramatic increase in Japanese GDP for the 4th quarter 2005. That event caused an outpouring of media reports that the Japanese economic was back on the fast track of economic growth. It was natural for the Spring-survey to echo that opinion. Secondly, those expectations have obviously not been born out by the first 2 quarters of 2006; growth was 0.5 in first quarter (after the 0.6 in fourth quarter 2005) and 0.3 in the second quarter. The slow down in growth has also been reported by the government. In actual fact, Japanese economic growth has continued in its recent trend of between 1 percent to a little under 2 percent per year. What about the future?

Recent reports continue to emphasize the role of investment in current growth. Macro-economists consider private investment the most volatile component of GDP but given the low domestic interest rates in Japan one would consider this investment boom to continue. What does cause the forecaster some concern is that the largest and most stable components of GDP, consumption and government expenditures, seem to be under pressure to decline or grow slowly. The large sovereign debt has forced the Japanese government actually to reduce its forecasted expenditures. While consumption has been a positive contributor when compared to increases over consumption in 2005, reports of declining domestic auto sales, declining population, negative effects on wages of a younger workforce and declines in the percentage of income consumed leads one to wonder if the consumer can become a significant force in future GDP growth.

That leaves the burning question of what will happen went interests rate return to “normal” in Japan. Will the investment boom end? And if investment returns to normal levels or actually declines below normal levels, which sector will become the engine for future growth?

Temple University Japan

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This survey has been supported by:

The Survey Report and additional comments from respondents are available in pdf format at:

http://www.fcc.or.jp/fcij/bcs.html

The next survey will be conducted in April 2007.

Foreign Chambers in Japan Foreign Chambers in Japan (FCIJ) has been conducting Business Confidence surveys online twice a year since 2002 among foreign-affiliated companies in Japan.

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