Confidence at Japanese companies fell to its lowest level in more than two years

Japanese Business Confidence Drops
Confidence at Japanese companies fell to its lowest level in more than two years, a closely-watched Bank of Japan survey showed Friday, amid rising anxiety about a possible slowdown in the U.S. economy and recent market turmoil.

The quarterly "tankan" survey's sentiment index for large manufacturers fell from 23 in September to 19, below the 21 mark predicted by analysts and the lowest score since September 2005. A similar index for large non-manufacturers in the survey, which polls more than 10,000 companies nationwide, fell to 16 from 20.

The indices measure the percentage of companies reporting positive business conditions minus those who are negative. A decline in the numbers means a growing portion of companies are pessimistic.

Analysts said the results, along with recent sluggish growth figures, suggest the central bank will hold off from raising interest rates as it gauges the U.S. economy , a key export market , and fallout from the subprime mortgage crisis that has rattled global markets.

"The possibility of a rate hike in the near future, which was slim to begin with, have declined further given the results of this report," Lehman Brothers economist Hiroshi Shiraishi said in a note published Friday. Japan's benchmark interest rate was raised to 0.5 percent in February.

Japanese Economy Minister Hiroko Ota said the tankan's results did not change her view that Japan's economy is on an upward trend, but said the government would keep an eye on risks, including high oil prices and possible weaker demand from American consumers.

"I don't think the basic trend has changed," Ota told a press conference.

In some positive news, the quarterly survey showed that major companies plan to boost capital investment by 10.5 percent in fiscal 2007, higher than the 8.7 percent increase in September's estimate.

Still, recent economic indicators have been mixed, and the yen's recent rise against the dollar could erode exporters' profits. Last week, the government said the economy grew at an annual pace of just 1.5 percent, worse than a preliminary estimate of 2.6 percent, due to a a downward revision in capital expenditure figures.

The tankan's results spurred traders to sell the yen, driving the dollar to 112.46 yen in early afternoon trade from 112.21 yen overnight in New York. The stock market's reaction was muted, with the benchmark Nikkei 225 index dipping just 0.14 percent to close at 15,514.51, although it has dropped 3.3 percent over the last three days.