Japanese Firms Gloomy About Economic Future

Japanese business confidence fell to the lowest in more than a year last quarter as the economy slid back into recession. Companies expect profits to fall, the central bank said early today.

The tankan survey’s index of large manufacturers’ confidence fell to minus 16 in June from minus 5 in March, the worst reading since December 1999. Economists had expected the index to fall to minus 18 after it dropped 15 points in March.

The tankan is considered the best gauge of business confidence in Japan. The Bank of Japan, the country’s central bank, canvasses about 9,000 companies, large and small, from chip makers to restaurants for their view on current and future conditions and earnings prospects. The survey was conducted between late May and June 30.

A negative index shows that pessimistic respondents outnumber those who are optimistic about the economy.

The drop in confidence, shared by small businesses, may worsen as the government caps spending on dams and roads and forces banks to cut off credit to insolvent companies. There’s little the central bank can do to alleviate the pain, having already pared interest rates to zero, signaling the economy may stay in recession for the rest of the year.

“There’s nothing good about the number--it’s a clear sign we are in recession,” said Kazuhiko Ogata, a senior economist at HSBC Securities Japan Ltd. “It’s the second straight two-digit drop in confidence, which means we’re on par with the previous recession, and perhaps even worse off.”

Stocks fell after the tankan was released. The benchmark Nikkei 225 index fell as much as 2% in early trading.

The slide in confidence was foreshadowed by companies from Nikon Corp. to Toshiba Corp. reducing profit forecasts, trimming production and paring spending on new factories and equipment. Sales to the U.S. and Asia, which account for about 70% of Japan’s exports, have fallen as global economic growth has cooled.

Prime Minister Junichiro Koizumi this weekend repeated his warning that his plans to fix the economy will cause some pain, such as two to three years of slow growth.