Japanese confidence crumbles

Prime Minister Koizumi won support for his reform agenda from U.S. president George Bush at the weekend

TOKYO, Japan -- Business confidence in Japan has taken a dive, delivering further evidence that the world's second largest economy is sliding deeper into recession.

Just days after fresh figures showed unemployment hitting a record high, the 'tankan' survey released by the Bank of Japan shows a sharp slump in business confidence among the country's leading manufacturers.

The key diffusion index for the June quarter came in with a reading of minus 16, the lowest level since December 1999.

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That means 16 percent more companies expect business to worsen, compared to those who expect conditions to get better.

While the figure is in line with expectations, it represents a steep drop compared to the March quarter reading of minus-five.

Economists say the gloomy survey of 8,853 companies, taken from May 31 to June 29, could pressure the central bank to loosen its already-easy monetary policy while underscoring the challenges facing Japan's reform-minded prime minister, Junichiro Koizumi.

Koizumi wins praise

Despite the gloomy figures, U.S. President George W. Bush praised Koizumi at the first meeting between the two leaders. He cheered Japan's leader for vowing to reform the country financial system in the face of a weakening economy.

ING Barings chief economist Richard Jerram told CNN that the tankan result showed just how damaging the downturn in the global IT cycle had been for Japan.

He said Japanese corporate profits would be hit badly, with some forecasts still "naively optimistic".

Jerram said the Japanese economy was unlikely to hit bottom until the first or second quarters of 2002. It could then see some growth in 2003.

But he warned there was still not enough determination to fix problems in Japan's financial system, where banks are burdened with billions of dollars of bad loans.

Worsening

"I think that this tankan survey basically confirmed our worry about the worsening of the economic condition," said Yasushi Okada, chief economist at Credit Suisse First Boston Securities (Japan).

The grimmer outlook for an economy which economists say may have already slipped into its second recession in two years sent a jolt through Japan's financial markets, pushing the yen down against the dollar and sending stock prices tumbling.

Traders said that although the tankan survey was not as grim as some had feared, it was weak enough to support a general assumption that Japan's economic fundamentals justified a lower yen.

The survey came just days after the central bank decided not to ease already ultra-loose monetary policy further despite a string of economic data pointing to a second straight quarter of contraction after the economy shrank 0.2 percent in the first three months of 2001.

Cut spending

In another key clue to the economy, the survey found big companies plan to cut their spending on plant and equipment by 1.3 percent in the business year started on April 1 from the previous year.

Corporate capital spending -- once a key driving force for Japan's tentative recovery last year -- has been stagnant since exports and production began falling this year amid a global economic slowdown, making firms wary of spending more on investment.

Big manufacturers see capital spending up 7.7 percent, but non-manufacturers expect capital spending to fall by 7.1 percent, the tankan showed. Small firms see capital spending dropping by 18.9 percent.