Japan's economy is enjoying its strongest growth for decades

Japan's major firms are less optimistic than they were three months ago, when confidence was at a two-year high.

Although many firms expect to cut their capital spending this year, they report generally strong economic conditions.

The Bank of Japan raised interest rates to 0.5% in February, a sign of its confidence in the economic recovery.

'On track'

Japan's economy grew at an annual rate of 5.5% in the last three months of 2006, sustaining what has been its best performance for many decades.

Although the Tankan quarterly survey of 10,000 firms showed a dip in confidence, more firms remain optimistic about future growth than those which do not.

The uncertain outlook for the Japanese yen and the weakness of the US housing market have clouded an otherwise benign picture for Japanese companies.

Analysts said the figures pointed to a lower level of economic growth in the first quarter of 2007 but also showed the economy was still in a healthy state.

On this basis, analysts expect the Bank of Japan to keep rates on hold this month.

"Overall, against a backdrop of mixed figures, the survey confirms that the recovery is on track," said Jan Lambregts, head of Asia research at Radobank.

"No-one expects the Bank of Japan to hike interest rates in the next couple of months."

Japanese markets fell in response to the Tankan figures, the benchmark Nikkei index ending the day down more than 1%.