UPDATE 2-BOJ tankan outlook worsens, points to policy easing

* Big manufacturers’ index improves to +8 vs forecast +6

* 2010/11 capex plans +2.4 pct versus forecast +4.2 pct

* Big manufacturers glum about outlook

* BOJ has been divided over how much monetary easing
needed
(Adds details, economist’s quote)

By Rie Ishiguro and Tetsushi Kajimoto

TOKYO, Sept 29 (BestGrowthStock) – Japanese manufacturers turned
more pessimistic about their outlook for the first time in
almost two years this quarter in a sign that a strong yen could
derail the economic recovery and spur the central bank to ease
policy next week.

The Bank of Japan tankan survey for the three months to
September showed big firms planned to raise capital spending at
slower pace than expected as a recovery in exports slows due to
a strong yen and slackening overseas demand.

The headline sentiment index improved to 8 from 1 in June,
exceeding the median market forecast of 6. But the index is
seen sliding to minus 1 in December, showing firms expect
conditions to worsen over the next three months and that
pessimists outnumber optimists. [JPBCLG=ECI]

This was the first time big manufacturers expected the
outlook to worsen since December 2008.

The BOJ has struggled to agree whether it should further
relax policy at the Oct. 4-5 meeting, but firms’ cautious views
and subdued spending plans could tip the balance in favour of
those calling for more easing.

Japan’s government intervened earlier this month to weaken
the yen, and some economists say additional monetary easing is
needed to ensure that intervention succeeds in shielding the
economy from a strong currency.

“The BOJ was really focused on corporate sentiment and the
yen strength is an obvious factor. They’ll be under greater
pressure to ease from the government … at the meeting next
week,” said Naomi Fink, Japan strategist at Bank of
Tokyo-Mitsubishi UFJ.

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Graphic on corp sentiment http://link.reuters.com/jyw63p

PDF report on yen intervention http://r.reuters.com/fac44p

More stories on Japan’s economy [ID:nECONJP]

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PRESSURE TO EASE

The lead 10-year Japanese government bond futures (2JGBv1: )
rose to a seven-year high on increased prospects for BOJ
easing, including a possible boost in bond purchases, while the
Nikkei stock average (.N225: ) climbed 0.6 percent.

The yen largely took the tankan in stride, however, trading
at 83.87 yen to the dollar (JPY=: ), little changed from just
before the data’s release.

Japan sold the yen (JPY=: ) in the market on Sept. 15 for the
first time in more than six years after its currency surged to
a 15-year high against the dollar.

The September tankan survey was conducted from Aug. 23 to
Sept. 28, but it did not capture the impact of intervention
because 70 to 80 percent of firms responded by the preliminary
deadline on Sept. 7, the central bank said.

Big manufacturers’ sentiment gauge in September improved
for a sixth straight quarter to its highest since March 2008,
while big service-sector firms’ confidence was the highest
since June 2008.

However, big firms’ plan to increase capital spending by
2.4 percent in the financial year to March 2011 came below the
market’s median forecast for a 4.2 percent rise and the survey
did little to ease concerns about a strong yen.

Big manufacturers expect the dollar to average 89.66 yen
(JPY=: ) in the fiscal year that started in April, which may be
overly optimistic.

“The expected exchange rate is still above current levels,
so foreign exchange could pose downside risks to the corporate
outlook,” said Yasuo Yamamoto, senior economist at Mizuho
Research Institute in Tokyo.

“The BOJ is likely to extend the duration of its funding
operations, and a return to zero interest rates is also
possible.”

Sources have told Reuters that the BOJ could loosen policy
if the recovery is deemed by the board to be under threat, with
an increase in government bond buying and a further boost to
its cheap fund-supply tool emerging as the most likely options.
[ID:nSGE68Q0KS]

Still, some BOJ officials have indicated that they want to
wait until there is further evidence that the strong yen and
slowing overseas growth are hurting the economy.

The BOJ may also be reluctant to pursue aggressive easing
because its decision could end up having limited impact if the
Federal Reserve eases policy at its next rate review on Nov.
2-3, causing the yen to appreciate further against the dollar.
(Additional reporting by Kaori Kaneko; Writing by Stanley
White; Editing by Edmund Klamann and Tomasz Janowski)

UPDATE 2-BOJ tankan outlook worsens, points to policy easing