Manufacturing Sentiment In Japan At Two-Year High

Country's widely watched tankan survey showed surprising strength in third quarter.

TOKYO (AP) - Japanese executives are the most optimistic they've been in two years about the economy, a key central bank survey showed Monday, possibly boosting chances for an early interest rate hike.

Defying predictions, the Bank of Japan's quarterly ''tankan'' survey - perhaps the country's most closely watched economic indicator - showed that the large manufacturers' sentiment index rose to 24 in September from 21 in June.

The index measures the percentage of companies reporting that business conditions are better minus those reporting that conditions are worse. The higher the number, the greater the portion of companies that are optimistic.

Analysts had projected the index would fall back to 20.

''The results are in line with our previous understanding that the economy is recovering,'' Chief Cabinet Secretary Yasuhisa Shiozaki said.

The survey also indicated that large businesses plan to boost capital expenditure by 11.5 percent on average in the current fiscal year through March 2007.

Investors cheered the news, driving stocks higher for a fourth straight session. The Nikkei 225 index rose 0.8 percent to 16,254.29 points.

Business optimism was fueled partly by the weakening yen, which makes Japanese exports cheaper and more competitive overseas, the BOJ's report said.

More importantly, the September tankan survey shows that corporate sentiment has remained solid since July, when the Bank of Japan raised its key interest rate for the first time in six years to 0.25 percent from virtually zero.

Lawmakers and business leaders had worried raising rates too soon might stifle Japan's nascent economic comeback, but the tankan shows the recovery remains on track. Monday's reading was the highest since September 2004, when the key manufacturing index stood at 26.

The latest results could spur expectations for an additional rate increase in coming months. Most economists expect the next hike to come at the end of the year or in early 2007. But Monday's tankan adds to other recent data pointing to a relatively strong rebound.

On Friday, the government said industrial production rose 1.9 percent in August from the previous month, while shipments jumped 2.5 percent. Meanwhile, the nation's core consumer price index rose 0.3 percent in August, offering fresh evidence that the economy is steadily pulling out of deflation.

However, a possible slowdown in the U.S. economy _ Japan's biggest export market _ has some businesses worried. Monday's tankan report showed that companies expect business conditions to moderate in coming months, and predict the tankan's major manufacturers index to drop to 21 in December.

''Current conditions are good, but there are many signs that the economy will slow down in the second half of this fiscal year,'' said Hiromichi Shirakawa, chief Japan economist at Credit Suisse.

Shiozaki urged the BOJ to not to act hastily and to keep a broad perspective on the economy.

''I hope the Bank of Japan will continue to decide its monetary policy appropriately by having a 360 degree view,'' Shiozaki said. ''I do not yet have any sense of overheating.''

Separately, Japanese Prime Minister Shinzo Abe, who assumed his post just last week, told parliament Monday that his government is targeting average economic growth of over 2.2 percent a year for next 10 years.

''It is indispensable to continue stable economic growth in order to prosper as a beautiful country,'' he said.

Over the past decade of anemic growth, Japan's economy grew an average of 1.2 percent.

Abe has promised to carry the economic reforms pursued by his predecessor, Junichiro Koizumi, including increasing privatization.