Large manufacturers' confidence weakest in 5 yrs.: BOJ's Tankan

TOKYO, July 2 Kyodo - Business confidence among Japan's major manufacturers deteriorated in the three months through June from the previous quarter, the Bank of Japan's closely watched Tankan survey showed Tuesday, at a time when companies have been increasingly under pressure from rising energy and raw material costs.

The index of big makers' sentiment came to 5, down from 11 in the previous
survey. It was the third consecutive quarter of decline, and the figure was at
the lowest level since September 2003, when it was 1.

Although the latest reading beat the average forecast of 3 in a Kyodo News
survey, analysts say the BOJ is unlikely to take any immediate action, given
the Tankan result. There were no major surprises and the bank will keep its
wait-and-see position with the main interest rate maintained at 0.5 percent,
they say.

The index for major nonmanufacturer confidence stood at 10, down from 12 in the
earlier three months and the fourth straight quarterly deterioration.

The diffusion index represents the percentage of companies reporting favorable
business conditions minus that of firms recounting an unfavorable environment.

Confidence among small manufacturers also weakened, with the index falling 4
points to minus 10 while that for their nonmanufacturing counterparts slid 5
points to minus 20, a sign that the negative impact of increasing crude oil and
material costs is more evident among smaller firms.

The negative fallout has hurt their balance sheets. The Tankan showed the index
that gauges companies' sentiment over purchase costs had reached the worst
level at both large and small manufacturers since 1980.

For the next three months through September, the index for large manufacturers
is expected to further deteriorate to 4 and nonmanufacturers to 8, the central
bank said.

Given gloomier prospects for the U.S. and global economy after the credit
crisis resulting from U.S. subprime mortgage problems, carmakers and other
major exporters seem to be losing their confidence. Smaller companies are also
projected to fall deeper into negative territory, the Tankan shows.

Among makers, auto, steel and textile industries showed major falls in their
indexes, while information, food and lodging industries marked sharp
deteriorations in the nonmanufacturing sector.

Large manufacturers forecast a 9.9 percent fall in their pretax profit for
fiscal 2008 and major nonmanufacturers expected a 3.8 percent decline -- both
for the first fall in seven years.

Hirokata Kusaba, senior economist at the Mizuho Research Institute, said
Japan's economic growth is slowing as companies are under pressure from higher
costs due to rising commodity prices, which also weakens consumer sentiment and
lowers domestic demands.

He said the BOJ's main interest rate stays at levels that reflect such
conditions. ''Given only limited risks of demand-pull inflation, (the BOJ) is
expected to stick to a wait-and-see stance by around summer next year.''

The government underlined that the Tankan result was largely affected by rising
raw material prices and the slowing economy in the United States, one of the
major destinations of Japanese exports.

''Small firms have been exercising caution on their outlooks,'' Hiroko Ota,
economic and fiscal policy minister, told reporters. But she also said, ''We
are not in the situation that would lead to a serious collapse'' in business
confidence.

Finance Minister Fukushiro Nukaga reiterated a government view that the
Japanese economy faces a ''lull'' in its expansion phase, but that at the same
time the world's second-biggest economy shows ''weakness in some parts.''

On corporate capital spending, the survey showed that big companies across
industries are planning to boost spending by 2.4 percent in fiscal 2008, which
ends next March.

Big makers will raise investment in such areas as plant and equipment by 6.7
percent while large nonmanufacturers are looking to cut their spending by 0.1
percent.

Capital spending by small companies in all industries is forecast to decline
20.2 percent.

The index for employment conditions at big companies in all industries slightly
improved to minus 9 from minus 12 in the previous survey. But it is projected
to turn worse again to minus 11 in the next three months.

The index is computed by subtracting the percentage of companies reporting a
labor shortage from that of those reporting a surplus.

The latest Tankan survey was conducted between May 28 and June 30, covering
10,579 companies, of which 98.9 percent responded.==Kyodo