The clouds lifted slightly from Japan's struggling economic landscape on Friday thanks to new figures that showed overall business confidence was improving.

The Bank of Japan's quarterly Tankan survey recorded a better-than-expected rise in confidence.

But the lull is likely to be short-lived, with gains in manufacturing outweighed by persistent gloom among service industries.

The Tankan "confirms the 2002 story of strong export-led growth and no feed-through to domestic demand", said Jesper Koll, chief economist at Merrill Lynch.

Unless the export benefits do make it into the home market, the chances of stopping deflation strangling any potential recovery remain slim.

Export-led

Japan's miraculous economic performance for most of the past half-century was built on a concerted drive for exports, and the experience gained is still paying off.

In June confidence rose sharply as hopes for a strong turnaround in the US fed optimism among manufacturers.

But since then the US recovery has faltered and Japanese optimism has faded.

The Tankan survey of 8,414 firms said there was little hope of a sustained recovery in sentiment even among the big manufacturers, with more investment cutbacks pencilled in for 2003.

Market gloom

The news from within Japan remained pessimistic as growth slowed.

The construction industry is still building huge tower blocks, partly funded by public money and helped by the fact that the building firms' unsustainable debts are still being propped up by their banks.

But profits and revenues are plunging, and the Tankan survey found that in the construction sector, confidence had slipped.

The markets were disappointed by the Bank of Japan's figures.

The benchmark Nikkei 225 index slid more than 2% to end Friday at a three-week low of 8,516 points.

And there was a 0.7 yen slip against the dollar to 122.58 yen at 0600 GMT.