Japanese executives more gloomy as yen soars

Japanese business confidence slumped to the lowest level in at least four years as executives worried about a stronger yen and uncertainty over the global economy, a survey showed Monday.

Sentiment among large companies dropped to minus 9.3 in the three months to March, down for a second straight quarter, from plus 0.5 percent in the previous quarter, a poll by the government showed.

The index was well below a figure of plus 2.4 predicted by respondents in the previous survey, and was the lowest since the government began compiling the data in their present form in 2004.

The index is calculated by subtracting the percentage of large firms reporting worsening business conditions from the percentage of those reporting an improvement.

Analysts said the drop in confidence resulted from the yen's surge to 12-year highs against the dollar -- which is bad for exports -- as well as growing worries about the US economy and soaring oil prices.

"Confidence has deteriorated considerably," owing to worries the US economy is slipping into a recession, noted Yoshikiyo Shimamine, senior economist at the Dai-ichi Life Research Institute.

Respondents expect the headline index to rebound to minus 2.3 percent in the second quarter, and to plus 6.6 in the third.

But analysts said those hopes could be dashed if the US economic slowdown hits emerging economies that have until now supported global demand and growth.

"The optimistic outlook of executives is excessive when the mainstream view is that the US economy has already stalled and there are fears that (the problems) could spread to Asia," said Shimamine.

He said that in order for confidence to rebound as predicted, the dollar would need to recover to about 120 yen, from close to the 100 yen level at present, "which is difficult to see happening at the moment."

Japan's combined capital investment in new equipment and factories is now expected to drop 9.4 percent in the fiscal year to March 2009, according to the survey of 11,127 companies, of which 78.9 percent responded.

Active spending by companies on new equipment and factories has been a key driver of Japan's recovery from a decade-long slump, but many firms are now looking to scale down investment to cope with an expected drop in earnings.

"These results suggest that capital expenditure growth will likely remain soft in the coming quarters," warned Lehman Brothers economist Kenji Abe.

Analysts expect the closely watched Bank of Japan "Tankan" survey of business sentiment, which is due on April 1, to reflect the worsening business conditions.

"We think the sharp slowdown in the US sparked by credit market turmoil will result in a tangible peaking out of business sentiment," Morgan Stanley economist Takehiro Sato wrote in a note to clients.

The survey is likely to show that for now companies plan to refrain from raising capital investment in the coming fiscal year starting in April.

"Moreover, given the prospect of dual economic slumps both in the US and Japan in the first half of 2008, plans may be revised down subsequently," predicted Sato.

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