Japan corporate mood gloomy amid economic woes

TOKYO (Reuters) - Japanese firms have grown pessimistic about business conditions, a government survey showed, fuelling fears that the Japanese economy may follow the United States into a recession.

The survey reinforced expectations that the Bank of Japan's closely watched tankan survey due out on April 1 will show a broad slide in the business mood and lackluster capital spending plans.

The business survey index of sentiment at large manufacturers slumped to minus 12.9 for January-March from plus 5.2 in October-December in a joint survey by the Ministry of Finance and the Economic and Social Research Institute, an arm of the Cabinet Office.

The index readings for January-March were the lowest in all categories since the survey was first conducted in April-June 2004.

"The data showed companies are getting cautious over capital spending as the economic outlook worsens and as share prices and the dollar have fallen," said Junko Nishioka, economist at ABN Amro Securities.

But the markets on Monday shrugged off the readings, which were seen as confirming weakness already reflected in other recent data. .T<FRX/>

The business malaise comes amid a slide in support for Japanese Prime Minister Yasuo Fukuda due in large part to a political stand-off that has left the central bank governor's post vacant for the first time in more than 80 years.

A newspaper poll published on Monday showed that support for the prime minister had fallen to 31 percent, down nine percentage points from a month ago while another poll by a private broadcaster put his support below 25 percent.

Vice Finance Minister Hiroki Tsuda said the sentiment survey results backed the government's view that the economy was at a standstill.

"The economy faces various downside risks, which we need to keep a close eye on," Tsuda told a news conference on Monday.

UNCERTAINTY ABOUNDS

The survey's index reading at large non-manufacturers fell to minus 7.2 from minus 2.2 last quarter, while that at big firms overall was down at minus 9.3 against plus 0.5 in October-December.

Monday's data boded ill for the BOJ's tankan corporate survey next week.

Economists expect the tankan's headline index for big manufacturer sentiment to fall to plus 13 from plus 19 three months ago, which would be the lowest reading since March 2004.

Rising costs of raw materials and uncertainty over the global economy seemed to have hurt the business mood, a finance ministry official said.

A Reuters survey last week showed Japanese manufacturers' sentiment slipped to a four-year low in March, battered by high raw materials costs, slack domestic demand, the dollar's fall and worries over the U.S. economic outlook.

Japan's economy, driven by solid exports, grew 0.9 percent in the last three months of 2007, despite economists' expectations for much slower growth.

Japanese land prices also rose in 2007 on robust demand for prime commercial property, data showed on Monday, a sign the nation was gradually exiting deflation.

But economists say deepening financial market problems could spell trouble for global economic growth, which Japan relies on heavily.

Domestic consumption has been tepid as wages have been kept in check, and though domestic housing investment appeared to have bottomed after a slump following the start of tighter building rules last June, uncertainty remains on the strength and the pace of its recovery.

Although many economists expect Japan to narrowly avoid a recession, some say its economy is already in recession and the BOJ may have to cut interest rates later this year.

"The weak figures (in corporate sentiment) reflect growing concern about a U.S. recession and turbulence in financial markets. It underscores our view that Japan and the United States will go through a mini recession," said Takehiro Sato, a Morgan Stanley economist.

Swap contracts on the overnight call rate, the BOJ's policy target, are pricing in around a 30 percent chance of a rate cut by June.