Gloom over Japan economy deepens

A slowdown in exports and company investment could hurt the economy

Japanese business confidence has hit a four-year low as fears grow that corporate profits will be hit by slowing US demand, a report suggests.

The Bank of Japan (BoJ) quarterly Tankan survey of 10,000 firms showed that the sentiment index of large manufacturers fell to 11 from 19.

It was the second quarter in a row that the index had declined and the bleakest showing since December 2003.

The survey adds to evidence that Japan's economic growth is stagnating.

The BoJ kept interest rates unchanged at 0.5% at its last meeting as it battled the twin challenges of rising inflation risks and a cooling economy.

The BoJ faces a difficult situation, with a growth slowdown coming at a time when consumer prices are rising Joseph Kraft, Dresdner Kleinwort

It faces these challenges now without a new leader after governor Toshihiko Fukui retired in March. So far a new appointment has been prevented by opposition party MPs.

'Difficult situation'

"The BoJ faces a difficult situation, with a growth slowdown coming at a time when consumer prices are rising," said Joseph Kraft, managing director at Japanese Capital Markets at Dresdner Kleinwort.

"It's highly likely the BoJ will keep interest rates on hold in coming months, but this tankan suggests the probability may rise for a rate cut before the year-end if data in coming months is weak and back up the deterioration in sentiment," he added.

Other analysts are worried that the Japanese economic recovery could be completely derailed and that a mild recession could be on its way.

There are signs that firms are cutting business investment - a key driver of economic growth.

The tankan survey showed that large manufacturers and non-manufacturers have scaled back capital spending by 1.6% in preparation of a weaker global outlook and a stronger yen, which makes exports more expensive.

The tankan comes up with its figures by subtracting the percentage of respondents who say business conditions are poor from the percentage of those who say they are good.

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