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Sunny economic sentiment aside, Japan needs real fixes for labor troubles, yen worries

Japan's major manufacturers are feeling upbeat about the future, more upbeat than they have been in 10 years, according to the Bank of Japan (BOJ)'s most recent quarterly "Tankan" survey of business sentiment, conducted in September. To put it another way, manufacturers are feeling almost as good about their prospects as they were a year before the Lehman Brothers collapse tipped the world into economic crisis.

Meanwhile, the BOJ continues its ultra-easy money policy, as inflation remains below the central bank's and the government's 2 percent target. However, with the Tankan results in mind, it is time to find the exit ramp from the monetary easing superhighway. It is time to consider getting out of crisis mode, and move to avoid an overheated economy.

The major manufacturers' diffusion index (DI), or business sentiment index, rose five points from the previous Tankan in June this year. The result came as a nice surprise for the market, which had been expecting a more modest improvement.

The electronic parts business is doing especially well on the back of demand for smartphone and datacenter components and manufacturing equipment for such parts is also going swimmingly. It is also clear that Japan's electronics makers, due to their excellent technological expertise, are the beneficiaries of the increasingly global adoption of "internet of things" networked devices.

On the other hand, among major non-manufacturing firms, the previous upward march of positive business sentiment plateaued among logistics companies, retailers, and the hospitality sector due to tough conditions. A summer of bad weather could be one cause, though it is also obvious that rising wages due to the labor shortage is also proving a burden. This being the case, it is easy to see a situation in which Japan fails to capitalize on the global economic recovery to kick-start a virtuous cycle of domestic demand.

Meanwhile, the average value of the yen hovered around the 109 yen to the dollar rate used for earnings forecasts. However, should overseas financial markets become unstable and the yen rise, Japanese export firms could see their earnings plummet. Even in this time of economic good vibes, the labor market needs to respond to the worker shortage, and Japanese companies are called upon to continue structural reforms such that they will not be at the mercy of a high yen.

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