UPDATE 2-Japan business mood worsens, BOJ seen holding fire

* BOJ tankan: Big manufacturers’ index at +5 vs forecast +3

* Sentiment worsens for 1st time in 7 quarters, outlook weak

* Big firms forecast modest growth in FY2010/11 capex

* No big negative surprise, BOJ seen standing pat for now
(Adds graphic, details)

By Leika Kihara and Rie Ishiguro

TOKYO, Dec 15 (BestGrowthStock) – Japanese manufacturers’ business
sentiment worsened for the first time in nearly two years this
quarter but the gloom was not as severe as expected, giving the
Bank of Japan breathing room before pondering its next move.

But big manufacturers expect conditions to deteriorate over
the next three months, the BOJ’s closely watched tankan survey
showed on Wednesday, keeping up pressure on the central bank to
support the fragile economy with its ultra-easy monetary policy.

“The figures show the economic recovery is in line with the
BOJ’s scenario, in that a slowdown is one-time and a recovery
will resume next year,” said Akiyoshi Takumori, chief economist
at Sumitomo Mitsui Asset Management.

“One trigger for further BOJ monetary easing would be for the
economy to show signs of deterioration, such as negative growth
in GDP for the January-March quarter.”

The headline index measuring big manufacturers’ sentiment
fell to plus 5 from September’s plus 8, marking the first decline
in seven quarters. But it exceeded a median market forecast of
plus 3.

The index for March next year was seen at minus 2, showing
that the murky economic outlook was making companies cautious
about business conditions in the coming three months.

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Graphic of BOJ tankan http://link.reuters.com/cyg68q

Highlights of BOJ tankan [ID:TOE6BD06A]

More stories on the Japanese economy [ID:nECONJP]

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BOJ policymakers are expected to scrutinise the tankan at
their rate review next week, although the central bank is seen
holding off on easing monetary policy further after having taken
action in October.

“The BOJ is likely to stick with its current status for a
while,” said Yoshiki Shinke, senior economist at Dai-ichi Life
Research Institute.

“Rather than economic indexes, the trigger is likely to come
from the market, such as stocks falling greatly or the yen
strengthening even more due to overseas events.”

MURKY OUTLOOK

Financial markets were swayed more by Federal Reserve policy
than the tankan. The benchmark 10-year Japanese government bond
yield (JP10YTN=JBTC: ) hit a seven-month high of 1.295 percent on
Wednesday, tracking gains in U.S. Treasury yields after the U.S.
central bank showed no signs of curtailing its stimulus measures.
[ID:nN14232588]

The pain from the yen’s surge to a 15-year high against the
dollar in November was evident with big manufactures, many of
which are reliant on exports, cutting their dollar/yen forecasts
and profit estimates for the latter half of fiscal 2010/11.

Still, corporate capital spending held up relatively well and
some analysts said the damage was contained by solid demand for
Japanese goods in fast-growing Asia.

“Big manufacturers are cautious about the outlook as the
economy is likely to be in a lull in the first half of next year,
but their profits have stayed firm probably because solid demand
from emerging economies offset the negative impact of the yen’s
rise,” said Yoshimasa Maruyama, an economist at Japanese trading
house Itochu Corp.

Big firms plan to increase capital spending by 2.9 percent in
the year to March 2011, slightly more than a median forecast for
a 2.7 percent rise and recovering from a 15.5 percent decline in
the year ended in March.

Japan’s economy is expected to have contracted slightly in
the October-December quarter on slowing overseas growth and
slumping factory output after the September expiry of government
incentives for purchases of low-emission cars.

Analysts expect the country’s economic growth to pick up
early next year with support from exports to fast-growing Asia,
but only modestly.

The BOJ has pledged to keep interest rates effectively at
zero until the end of deflation is in sight and rolled out a 5
trillion yen ($60 billion) pool of funds to buy assets ranging
from government bonds to corporate debt.

The central bank has said topping up the fund is a strong
option if the economy worsens more than expected but it does not
want to do so too soon. [ID:nTOE6B904N]

The tankan’s sentiment indexes are derived by subtracting the
percentage of respondents who say conditions are poor from those
who say they are good. Positive readings mean optimists outnumber
pessimists.
($1=83.60 Yen)
(Editing by Edmund Klamann)

UPDATE 2-Japan business mood worsens, BOJ seen holding fire