UPDATE 3-BOJ tankan improves, but capital spending still weak

* Big manufacturers’ index improves to -14 vs forecast -13

* 2010/11 capex plans -0.4 pct versus forecast -0.5 pct

* Deflation, excess capacity still squeezing profits

* Analysts expect BOJ to remain under pressure for easing
(Adds quotes, details)

By Stanley White

TOKYO, April 1 (BestGrowthStock) – Japanese business morale
improved to the highest in more than a year but companies
remain cautious about spending, a Bank of Japan survey showed,
suggesting that government will not let up in its calls for
more monetary easing.

Expectations that raw materials costs will rise and retail
prices fall also show how deflationary pressure is threatening
profits as companies struggle to pass on higher costs to
consumers.

The headline index for big manufacturers’ sentiment
improved to minus 14 in March from minus 25 in December, its
best reading since the failure of Lehman Brothers shocked
financial markets in September 2008, from minus 25 in December.
It roughly matched a median estimate of minus 13. [JPBCLG=ECI]

The improvement in the tankan survey’s headline business
sentiment number could be seen as easing the pressure on the
central bank to further loosen its policy.

But the government cannot afford to worsen Japan’s debt
burden much more, so it expected to continue leaning on the
central bank to support the economy as its approval ratings
slump before an upper house election expected in July.

“Looking at business confidence alone, the Bank of Japan
may be right in saying that the economy is picking up. But the
level of economic activity itself is still low,” said Takeshi
Minami, chief economist at Norinchukin Research Institute.

“The BOJ has said its biggest priority is to pull Japan out
of deflation. Even if business confidence improves, the BOJ is
likely to remain under pressure for further easing unless
prices start rising.”
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Tankan graphic: http://link.reuters.com/vyw95j
Production capacity graphic: http://link.reuters.com/wyw95j
More stories on Japan’s economy [ID:nECONJP]
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The index for June was seen at minus 8, showing firms
expect conditions to improve three months ahead, the closely
watched quarterly survey showed on Thursday.

But the economic recovery could struggle to pick up pace as
companies are cautious about boosting wages or spending on
plant and equipment, analysts say.

Big firms plan to cut capital spending, a key driver of the
economy, by 0.4 percent in the financial year to March 2011,
against the median forecast for a 0.5 percent fall.

Japanese firms tend to increase their planned capital
spending as the fiscal year progresses, but any gains could be
limited as they have been slow to make use of excess capacity.

The BOJ is expected to hold fire at its policy meeting next
week, after having just decided last month to double the amount
of funds available to banks for three-months loans at the
benchmark rate of 0.1 percent. [ID:nSGE62G03I]

The March decision has brought down money market rates, but
the measures are unlikely to end deflation given the large gap
between supply and demand. That means the government is likely
to keep up pressure for further monetary policy loosening
partly to prevent a rising yen from hurting exports, analysts
say.

“The government will probably focus on rising input costs
and falling product prices, which squeeze company profits, so
will keep up pressure on the Bank of Japan to do more to beat
deflation,” said Takahide Kiuchi, chief economist at Nomura
Securities.

“The BOJ’s likely next step would be to extend the duration
of cheap funding operations to six months from the current
three. The government may want the bank to increase its JGB
purchases but that is unlikely at least until later in the year
when the government takes concrete steps to restore fiscal
health.”

An index measuring manufacturers’ output capacity improved
in March but still showed that companies have idle capacity
more than a year after the global financial crisis.
[ID:nTOE62U06K]

Japan had a spotty recovery last year from recession and
some economists say growth could slow in the first half of this
year as the impact of subsidies on energy-efficient goods fades
and the government cuts public works.

Stock Investing

(Additional reporting by Tetsushi Kajimoto, Rie Ishiguro;
Editing by Tomasz Janowski)

UPDATE 3-BOJ tankan improves, but capital spending still weak