First, pressure may be exerted on strong banks to take over failed banks, thereby weakening the former. Although the yen has strengthened somewhat on the expectation of permanent income tax cuts, the rally has been capped by recent data that indicates further weakness in Japanese economic activity, at least in the near term. Industrial output fell 2.0 percent in May as manufacturers attempted to trim their high level of inventories. The confidence of non-manufacturers stabilized, albeit at a low level. The passage of the 16 trillion fiscal stimulus package in April may have underpinned the sentiment of non-manufacturers.
Business confidence is an important indicator of business fixed investment spending.
Firms are likely to cut back investment spending, depressing overall economic activity further, if they have a negative outlook on business conditions. Machinery orders, another important indicator of business fixed investment spending, dropped 20 percent in May relative to their year-ago level. Construction orders slid nearly 28 percent. As the economy has slipped into recession yet again, the labor market has weakened. The unemployment rate in May remained at the postwar high of 4.1 percent.