Japanese business less confident

Japanese businesses are worried about exports and oil prices

Business confidence among Japanese companies has fallen sharply over the past quarter as the economy's recovery stuttered, according to new data.

The Bank of Japan's influential tankan report showed a decline in optimism among firms in March on concerns about weaker exports and high oil prices.

Analysts said the figures were worrying but pointed to the fact that firms think capital investment will rise.

Japan suffered a mild recession in the middle of last year.

Less favourable

Despite seeing two successive quarters of negative growth in 2004, the Japanese government insists that its economy - which stagnated for much of the 1990s - is gradually recovering.

The quarterly tankan report adds up the number of firms seeing favourable compared to unfavourable trading conditions.

The bright side of it is that companies are not expecting a big deterioration Seiji Adachi, Deutsche Securities

In March, the headline index for large manufacturers slipped to plus 14 from plus 22 in December.

Experts had been forecasting a rise in the index to plus 23.

"It's very bad," said Azusa Kato, an economist with BNP Paribas.

"We had thought that the inventory adjustment in the electronics sector was nearly finished but perhaps conditions are worse than we expected."

Poor data

A slew of poor data in recent weeks has raised questions about the sustainability of the Japanese economic recovery.

Unemployment rose unexpectedly in March while retail sales and household spending fell.

Despite the latest figures, ministers said there was no reason to panic.

"The economy on the whole is in consolidation," said economic minister Heizo Takenaka. "The figures generally underscore a recovery trend."

Silver lining

Despite the uncertain outlook, manufacturers do not expect trading conditions to worsen over the next three months.

They also expect to increase capital investment by 1% in the year to March 2006.

"The bright side of it is that companies are not expecting a big deterioration," said Seiji Adachi, senior economist at Deutsche Securities.

"If that scenario had collapsed, then the capex figures would have been much weaker."