LEAD: Japan industrial confidence wanes on strong yen, euro crisis

Dec 15, 2011, 6:28 GMT

Tokyo - Confidence among Japan's large manufacturers fell into negative territory in the final three months of the year as the eurozone's debt crisis, a high yen and flooding in Thailand dampened prospects for the world's third-largest economy, the central bank said Thursday.

The Bank of Japan's quarterly Tankan survey slid to minus four from October to December from a positive two in the previous quarter in its first dip in two quarters.

The respondent companies also forecast a further worsening of sentiment over the next three months.

A negative number indicates pessimists outnumber optimists. The decline was larger than analysts had expected and indicated the difficulty Japan would have in recovering from a March earthquake, tsunami and nuclear accident.

Japan, whose economy is reliant on its exports, is struggling with a yen that has hit postwar highs this year, making its products more expensive abroad.

The Thai floods have disrupted supply chains and its manufacturing, and it has also been hit by the slack economies in its largest markets, Europe and the United States.

The survey raised fears that companies would put off hiring and investments amid the uncertainties, worsening Japan's overall economic prospects.

The results could also prompt markets to expect a further loosening of monetary policy by the central bank in the coming months. The bank's council is to meet on Tuesday.

The most pessimistic sector was electronics manufacturing, where the mood barometer sank to minus 21 in the December quarter, from minus five in the previous survey. The export-intensive industry is particularly sensitive to cycles in the global economy.

Carmakers were positive, despite their exposure to the high yen and to floods in Thailand, which affected many Japanese-owned car factories.

The mood index in the automotive sector jumped from plus 13 to 20. This could be due to the collective relief from the restoration of supply chains that were broken by the March 11 earthquake and tsunami, the central bank said.

But it cautioned that the survey might not reflect all the concerns about the Thai floods among carmakers who were interviewed before the effects of the disaster were fully known.

Large non-manufacturing companies were also more optimistic, showing a mood index reading of plus four, up from plus one in September.

Strong domestic consumption, which makes up 60 per cent of the economy, could be behind the positive sentiment, particularly among retailers, analysts said.

The finding prompted some economists to estimate that Japan is on the way to economic recovery despite the slump in the world economy and the strength of its currency dampening its exports.

The survey said all companies, including both industry and non-manufacturing, were planning to increase their capital investments by 1.4 per cent in the current financial year to March, a lower year-on-year increase than expected.

The Tankan survey is based on companies' detailed answers to a range of questions on their stocks, interim or predicted earnings, as well as investment or recruitment plans.

The survey includes analysis, conjecture and reports on business sentiment, and is closely monitored worldwide for indications of the country's economic trends.