Japanese manufacturers remain gloomy over high oil prices, the strong yen and weaker growth in Asia, according to a central bank survey that defied expectations that business confidence is improving in the world's third-largest economy.
The Bank of Japan's quarterly "tankan" released Monday showed the main index for big manufacturers at minus 4 for the January-March quarter, unchanged from the last quarter of 2011.
A negative reading indicates greater pessimists outnumber optimists among those surveyed.
Many analysts had forecast an improvement to minus 1, given easing concerns over the crisis in Europe and signs of a rebound in production following last year's disasters.
Higher costs for energy will further undermine the competitiveness and profits of Japanese manufacturers at a time of uncertainty about growth in Asia.
"It's not only high oil prices, but overall commodity prices are increasing, and those overall widely affect business conditions," said Junko Nishioka, an economist at RBS Japan Securities.
"Even though export conditions will improve from now on, it's difficult to anticipate that business conditions will improve very soon," she said.
Data released last week showed weaker than expected factory production in February, with industrial output falling 1.2 percent, underscoring the fragility of the economic recovery as growth in Asia slows.
Conditions had been seen as improving thanks to a recovery from the production disruptions caused by widespread flooding in Thailand last year, on top of Japan's earthquake, tsunami and nuclear disasters.
Given Japan's heavy reliance on exports, much depends on conditions elsewhere in Asia.
"It's a little too early to judge so companies are likely to show some cautiousness in their judgment," said Masayuki Kichikawa, an economist at Bank of America-Merrill Lynch.
The tankan showed an improvement in most nonmanufacturing industries, with readings for services and telecommunications showing a positive outlook, though energy and construction indices remained in negative territory.
Japan's exporters are struggling with the strong yen, which surged to post World-War II highs against the dollar as the U.S. central bank pursued stimulus policies that contributed to a weaker greenback. When the yen climbs, it reduces the value of exporters' overseas profits when repatriated to Japan.
Although the yen has fallen slightly after monetary easing by the Bank of Japan in February, large manufacturers are pessimistic over its likely future course.
Large manufacturing companies assume an average exchange rate of about 78 yen per dollar for this fiscal year that started April 1 compared with current rate of nearly 83 yen per dollar.
The survey forecasts business sentiment among large manufacturers to rise only marginally to minus 3 over the next quarter. Medium-sized and small manufacturers expect business conditions to deteriorate.
"As long as the large manufacturers are at a low level ... it is unlikely that the small and medium-size business activity will recover in the near future," Nishioka said.
The Bank of Japan surveyed 10,894 companies nationwide. About 99 percent responded.
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