By Yoko Nishikawa
TOKYO, July 2 - Corporate confidence in Japan crumbled in the March quarter, a key central bank survey showed on Monday, providing yet more cause to fear the world's second-biggest economy is tipping into recession.
The Bank of Japan's (BOJ) "tankan" short-term survey produced a headline figure of minus 16 for the sentiment diffusion index (DI) reading for large manufacturers, diving from minus five in March, when the DI worsened for the first time in nine quarters.
The figure -- the same as forecast in a ' survey of economists last week -- was the worst since the minus 17 posted in December 1999.
Economists said the survey of 8,853 companies, taken from May 31 to June 29, could put more pressure on the BOJ to loosen its already-easy monetary policy while underscoring the challenges facing Japan's reform-minded prime minister, Junichiro Koizumi.
U.S. President George W. Bush threw his weight Koizumi's economic agenda on Saturday at a relaxed summit meeting, praising his vows for reform in the teeth of a weakening economy.
"I think that this tankan survey basically confirmed our worry about the worsening of the economic condition," said Yasushi Okada, chief economist at Credit Suisse First Boston Securities (Japan).
The grimmer outlook for an economy which economists say may have already slipped into its second recession in two years sent a jolt through Japan's financial markets, pushing the yen down against the dollar and cutting into stock prices.
Traders said that although the tankan survey was not as grim as some had feared, coming in-line with analysts' expectations, they said it was weak enough to support a general assumption that Japan's economic fundamentals justified a lower yen.
By 10:05 a.m., the Tokyo stock market's Nikkei benchmark average was down 1.71 percent at 12,747.61, while the yen was around 124.98 against the dollar.
PRESSURE ON BOJ
The survey came just days after the central bank decided not to ease already ultra-loose monetary policy further despite a string of economic data pointing to a second straight quarter of contraction after the economy shrunk 0.2 percent in the first three months of 2001.
"The key focus of this number should be expectations of a further easing by the Bank of Japan. The probability of a change in monetary policy toward easing has increased," Vincent Musumeci, economist at ABN AMRO.
The tankan index subtracts the percentage of firms reporting unfavourable conditions from those with favourable responses. A positive reading means optimists outnumber pessimists. It is closely monitored by markets for clues on monetary policy.
The big manufacturers' DI was much bleaker than the firms had anticipated when the central bank conducted its previous survey.
In another key clue to the economy, the survey found big companies plan to cut their spending on plant and equipment by 1.3 percent in the business year started on April 1 from the previous year.
Corporate capital spending -- once a key driving force for Japan's tentative recovery last year -- has been stagnant since exports and production began falling this year amid a global economic slowdown, making firms wary of spending more on investment.
Big manufacturers see capital spending up 7.7 percent, but non-manufacturers expect capital spending to fall by 7.1 percent, the tankan showed. Small firms see capital spending dropping by 18.9 percent.
BOJ policymakers take into account the outcome of the tankan survey when deciding monetary policy, although the weak results probably fall within the expectations held by the central bank when it last eased in March.
However, speculation of further monetary easing lingers as the economy may deteriorate more sharply amid a cyclical downturn and the possibility of a rise in deflationary pressures as Prime Minister Junichiro Koizumi presses ahead with structural reform.