Japan business sentiment hits 4-year low - tankan

Business sentiment among big Japanese manufacturers has sunk to a four-year low, a Bank of Japan survey showed on Tuesday, further evidence of a worsening economic outlook and reinforcing market speculation that the central bank may cut rates later in the year.
Worries about the global credit crunch, rising raw material costs, fragile share prices and a stronger yen contributed to weaker confidence, and the outlook for the coming quarter was even bleaker.
Eroding optimism also led to the weakest capital spending plans by large firms in six years. Economists warned that companies were underestimating the effect of a stronger yen, suggesting further profit and capital spending downgrades.
"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."
The BOJ's closely watched tankan quarterly corporate survey showed the headline index of big manufacturers' sentiment fell to plus 11 from plus 19 in the previous survey, and below the market's median forecast of plus 13.
That was the lowest since a reading of plus 7 in December 2003 and the eight-point drop was biggest in three years, but financial markets mostly took the survey in stride.
The yen fell slightly against the dollar after the tankan to trade around 99.80 yen Tokyo stock market's Nikkei average .N225 ignored the survey. It lost 18 percent in January-March, the worst worst quarterly performance since 2001. The outlook for June was plus 7, a sign that big manufacturers expect conditions to worsen. The index is the percentage of firms reporting a favourable business environment minus those reporting unfavourable conditions.

WEAKEST CAPEX PLANS IN 6 YEARS
The tankan, meaning short-term economic outlook, also showed big firms planned to cut capital spending, which has been a key engine for Japan's growth, by 1.6 percent in the business year that started on Tuesday.
That was the bleakest capital spending reading for a March tankan since 2002, although companies tend to be cautious on capital spending at the start of the business year and gradually revise up their plans as the year progresses.
Cabinet ministers stuck to the view that the world's second-largest economy is stalling, and remained cautious.
"I am very worried about declines in capital spending plans, particularly for big manufacturers," Economics Minister Hiroko Ota told a news conference.
"The key to the outlook for Japan's economy is how big and how long the U.S. economic slowdown would be," she said.
Japan's economy grew a surprisingly strong 0.9 percent in the last quarter of 2007, but economists expect growth to slow in 2008 amid fears that the U.S. economy -- Japan's No.2 trading partner after China -- is heading into recession.
Japan's annual inflation hit a decade-high 1.0 percent in February, but that was due to rising oil and food prices and not prompted by an improving economy, giving the central bank the dilemma of dealing with rising prices in a slowing economy.
No rate move is expected by most economists when the BOJ's policy board has its next meeting on April 8-9. Markets expect the central bank to leave interest rates at 0.5 percent for a while, though some see a rate cut on the horizon.
Investors are pricing in a 25 percent chance of a central bank rate cut by June and a 55 percent chance of a cut by the end of the year.
"When the index goes down for two straight quarters, about 80 percent of the time the economy risks tipping into a recession," said Yoshikiyo Shimamine, chief economist at Dai-ichi Life Research Institute.
The yen has risen about 10 percent against the dollar so far this year. Big manufactures said in the tankan they see the dollar averaging 109.21 yen in fiscal 2008/09, down sharply from their previous outlooks but still putting the yen much weaker than it is trading at currently.
"This indicates ample possibilities for downward revisions in capital spending and earnings outlooks. I worry about the negative implications going forward," Shimamine said.
"But I don't expect a rate cut by the BOJ. They will likely maintain that the current rate level doesn't leave room for a cut and the economy is still generally growing."
Adding to concerns over the murky economic outlook, policy paralysis in parliament has left the central bank without a permanent governor and sparked speculation that Prime Minister Yasuo Fukuda could lose his job.