Japanese business sentiment has suffered its sharpest fall since the 1970s oil crises, taking the Bank of Japan's tankan survey to its lowest in nearly seven years and adding gloom to an economy facing a lengthy recession.
The dismal data in the closely watched quarterly survey fueled speculation that the Bank of Japan, set to review rates and downgrade its economic assessment this week, will cut its already low interest rates of 0.3 percent.
The financial crisis means shrinking sales for Japanese companies, prompting capital spending cuts and a fearful outlook, amid signs of the longest recession on record for the world's No.2 economy, with companies even more gloomy in their outlook.
Adding to the tough prognosis, BOJ Governor Masaaki Shirakawa told the FT the Japanese economy may contract in the year to March 2010.
Yasuo Yamamoto, senior economist at Mizuho Research Institute said the deteriorating global economy and a rapid rise in the yen was hurting exporters and he saw the central bank cutting rates as early as this week.
"There's a possibility that Japanese corporations' profit forecasts will be further downgraded due to the yen's appreciation," Yamamoto said.
"The Bank of Japan is expected to lower interest rates this week. In addition, the central bank is expected to take other measures to increase liquidity."
The yen traded at around 90.90 per dollar, slightly weaker than before the tankan but eyes were more on a nearly 4 percent jump in Tokyo's benchmark Nikkei share average on hopes for a U.S. autos bailout.
The U.S. economy is also headed for its longest period of contraction on record as the credit crisis bites, making another Federal Reserve interest rate cut this week to 0.50 percent a near certainty, a Reuters poll found.
Fears of a global recession, shrinking exports and the yen's jump to a 13-year high against the dollar are hurting corporate revenues, prompting firms to slash output and capital spending as Japan grapples with its first recession in seven years.
An index gauging big Japanese manufacturers' sentiment worsened to minus 24 from minus 3 in the survey three months earlier, the December tankan showed, slightly worse than the market's median forecast of minus 23.
That was the most bleak reading since March 2002, when the economy was recovering from a prolonged slump sparked by a banking crisis.
The quarterly slide was the biggest since the 1970s oil shocks, matching a fall in early 1975 and second only to a record slide in mid-1974.
The big non-manufacturers' index worsened to minus 9 from plus 1 in the previous survey, turning negative for the first time in five years.
Companies were even more pessimistic about the outlook.
The index measuring big manufacturers' outlook for three months ahead fell to minus 36, while that of big non-manufacturers declined to minus 14.
Japan's economy sank deeper into recession in the third quarter, fuelling fears that the world's second-largest economy is facing its longest contraction ever combined with a return to deflation.
The collapse in global demand has forced leading Japanese companies such as Sony and Canon to slash jobs and investments and the yen's strength is threatening to further erode their export earnings.
Reflecting the gloom, big companies said they were cutting capital spending by 0.2 percent in the fiscal year to next March, the survey showed.
The Bank of Japan cut its key policy rate to 0.3 percent from 0.5 percent in October and unveiled a series of measures to ease credit strains as the fallout from the global financial turmoil spread.
The central bank's next policy-meeting will be held for two days until Friday.
The BOJ indexes are derived by deducting the percentage of respondents who say business conditions are poor from those who say they are good. Negative readings mean pessimists outnumber optimists.
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