Japan manufacturers hurt by yen rise-Reuters Tankan

(For more stories on the Japanese economy, click [ID:nECONJP])

* Manufacturers' confidence down for first time since March

* Service sector sentiment up a bit for 2nd straight month

* Corporate mood seen up by Jan but still at negative level

By Izumi Nakagawa

TOKYO, Oct 15 (Reuters) - Confidence among Japan's manufacturers has fallen for the first time in seven months, hurt by rises in the yen and oil prices as well as weak demand at home and abroad, a Reuters monthly poll showed.

Service-sector firms' sentiment improved slightly for the second straight month but still hovered just above a record low seen early this year when Japan was mired in its worst recession since World War Two.

Both manufacturers and nonmanufacturers expect conditions to improve in the coming three months, but sentiment indexes for both sectors were expected to remain negative, reflecting a fragile recovery due to sluggish demand.

The Reuters Tankan is a leading indicator for the Bank of Japan's influential quarterly tankan survey, and has had around a 95 percent correlation.

For a graphic tracking the two surveys click: r.reuters.com/xup73f

The BOJ tankan released on Oct. 1 showed that Japanese business morale improved further in the three months to September from a record low hit earlier this year but remained negative for the fifth quarter in a row. [ID:nT60733]

Although the world's No.2 economy crawled out of recession in April-June after a year of sharp contraction, the government is worried about rising unemployment, with production levels and exports much lower than those seen before the plunge in worldwide trade earlier this year.

That concern was shared by respondents to the Reuters poll.

"Orders from our customers had been recovering gradually until July, but they have turned flat since then," a precision machine manufacturer said in the survey.

While one transport equipment maker complained about a lack of strength in a pickup in sales, another expressed concern about the underlying appreciation of the yen.

Already under pressure, the dollar fell below 89.00 yen on Wednesday towards a recent eight-month low of 88.01 yen JPY= hit earlier this month, helping the yen rise across the board. [FRX/]

Illustrating the pain that recent rises in crude oil and other raw materials prices inflicted on materials sector firms, the sentiment indexes sagged at textile/paper and oil refinery/ceramics firms.

The Reuters survey of 400 firms, of which 245 responded, was conducted from Sept. 24 to Oct. 9, a period in which the dollar fell to a 8-½ month low below 89 yen.

The manufacturers' sentiment index fell 2 points to minus 35 in October from minus 33 in September, down for the first time since March, when it hit a record low of minus 78. The index at nonmanufacturers edged up 1 point to minus 33 from minus 34 in September, barely above a record low of minus 39 hit in February.

The readings are seen improving to minus 22 at manufacturers and minus 20 for service-sector companies. [ID:nT315595]

On Wednesday, the Bank of Japan did not say what it planned to do about temporary steps to help corporate finance that had been expected to end in December.

It upgraded its view on the economy, saying it was recovering, but left its assessment on financial conditions unchanged from last month, saying they were increasingly showing signs of improvement despite lingering severity in some areas. [ID:n302216]

The Reuters Tankan indexes are calculated by subtracting the percentage of pessimistic respondents from optimistic ones. A negative figure means pessimists outnumber optimists. (Writing by Tetsushi Kajimoto; Editing by Michael Watson)