Rising hopes fail to lift Japan gloom

A BETTER-than-expected result from the Bank of Japan's quarterly survey of business confidence failed to lift the gloom over the world's second-largest economy today, as the Tokyo stock market continued its longest losing streak for more than two years.

The key index for large manufacturers, the most closely watched in the BoJ's Tankan survey, improved to minus 9 compared with minus 14 in September. It is expected to come in at minus 10 in the next survey, underlining the fragility of business confidence.

The index is calculated by taking the number of respondents who expect business to improve and subtracting the number who think conditions will worsen.

The result was the third consecutive rise in the index. But the optimism was clouded by worsening sentiment among large non-manufacturers, whose index fell from minus 13 to minus 16, and by an expectation that large firms plan to cut capital expenditure.

Non-manufacturers have been pessimistic about their business outlook for six years, with their index last registering a positive result in 1996.

Large companies plan to reduce capital expenditure by an average of 6.8% for the financial year ending next March, a more pessimistic result than the 6.2% reduction companies said they planned in September. Expectations of profitability were improved among big manufacturers who forecast their pre-tax profits will rise 31.8% next year, against 31% in the last survey.

Japanese Economics Minister Heizo Takenaka said the Tankan confirmed the government's view: 'We have been saying that the economic environment remains tough and although there are signs of a recovery, such movement is becoming more gradual due to slowing economic demand.' Takenaka said the government and the BoJ must cooperate to end persistent price falls and put Japan back on a growth track.

Analysts said the Tankan illustrated there were two speeds in the economy - one speed for exporters and a slower one for companies relying on domestic demand. 'Japan is still extremely vulnerable. If exports trail off next year things could slow down even more,' a broker at a US house in Tokyo said.

The main market reaction was a slight firming of the yen, with the Japanese unit trading at around 122.55 to the greenback. The stronger currency, however, undermined exporting shares on the stock market as the Nikkei 225 Average fell 192.62 to 8516.07.