Tokyo, April 2 (Bloomberg) -- Japanese business confidence fell for the first time in more than twoyears in the first quarter as companies said a drop in export orders will force them to pare theirexpansion plans. The Bank of Japan's Tankan survey showed the main index of large manufacturers' confidence fell tominus 5 points last month from 10 in December. That was below the median forecast of 1 point in aBloomberg News survey. The index is expected to fall to minus 8 this quarter, the survey showed. The drop in confidence, shared by small manufacturers, builders and wholesalers, heightenedconcern that the economy's two-year-old recovery has stalled. Bond yields rose on investor concernthe government will spend more money on public works such as roads and airports to stimulategrowth. The loss of confidence ``isn't just suggesting a slowdown in the economy, it's almost pointing to arecession,'' said Kazuhiko Ogata, a senior economist at HSBC Securities (Japan) Ltd. ``Japan is ina dilemma. The BOJ has done what it can do. The next thing people would be expecting is morespending from the government.'' The economy grew 0.8 percent in the fourth quarter of last year after shrinking 0.6 percent in thethird quarter. Full-year growth is expected to slow to 0.7 percent in 2001 from last year's 1.7 percent,according to the latest Bloomberg News survey of economists.
Bonds, Stocks Fall
After cutting interest rates to close to zero last month, and saying it would keep them there untilconsumer prices stop falling, the central bank is urging the government to push through reforms torevive growth. Ten-year bond yields rose 10 basis points to 1.37 percent. As investors bet the government will sell more bonds to finance extra spending. Another option for the government is to allow the yen to weaken, cushioning exporters from the effectof slower sales. The yen fell to a 2 1/2-year low of 126.55 immediately after the Tankan wasreleased. It rebounded to be recently be trading at 126.11 to the dollar after Finance Minister KiichiMiyazawa said the yen's decline 2.8 percent decline the past five days was ``too rapid.'' The benchmark Nikkei 225 index, coming off a 36 percent decline in the fiscal year ended Saturday,fell as much as 0.1 percent, led by retailers Ito-Yokado Co. and Seven-Eleven Japan Co.
Exports Seen Falling
Large manufacturers said they expect exports to decline 0.1 percent in the fiscal year startedyesterday, after rising an estimated 4.3 percent the previous year, the Tankan survey showed. The drop in overseas sales will give companies less to spend, robbing the economy of one of itsmain engines of growth. Companies said capital spending will rise 2.3 percent this fiscal year, afteran estimated 14.6 percent gain last fiscal year, the survey showed. Including spending on computer software, investment rill rise 2.4 percent this fiscal year, down froman estimated 11.8 percent gain last fiscal year, according to the survey. ``We don't see how the economy can avoid slipping back into recession if capital investmentdeclines,'' said Kazuyuki Tazawa, a senior economist at Sumitomo Mutual Life Research Institute.``It appears growth peaked in the second or third quarter of last year and is now heading down.'' In the previous Tankan, released Dec. 13, the BOJ forecast the main index would be at 7 points inMarch. A negative reading means more companies are pessimistic than optimistic about theeconomy. The main index turned negative in February nine months after turning to a positive readingfor the first time in 2 1/2 years.
Production Slows
The Tankan is considered the best gauge of business confidence in Japan. The BOJ canvassesabout 9,000 companies, large and small, from automakers to shipbuilders to banks, for their view oncurrent and future economic conditions and their earnings prospects. Makers of personal computers, cell phones and other electrical machinery were the hardest hit, theTankan showed. The confidence index tracking the industry fell 39 points -- more than double theaverage for large manufacturers -- to minus 9. Demand for those goods was a key source ofeconomic growth last year. Confidence has deteriorated as economic growth in the U.S., the country's biggest export market,slows. Exports, by volume, posted the first back-to-back decline in almost two years in January andFebruary. ``We are being affected by the slow economic situation in overseas economies,'' said MasahiroAshino, chief spokesman at Aiwa Co., which last week announced it would cut about one-third of itsworkers. ``World-wide demand for audio-visual products is shrinking.''
Small Businesses
What's ailing manufacturers is also hurting retailers, real estate agents and other businesses. Theconfidence index for large non-manufacturers fell to minus 13 in March from minus 10 in December.Capital spending among large non-manufacturers is expected to fall 8.8 percent this fiscal year. Small companies are also being hurt, as many of them rely on business from larger firms. Thesentiment index for small companies fell to minus 28 from minus 20 in December. Investment amongthose companies, including spending on software, is expected to fall 20.4 percent this fiscal year.