TOKYO (AP) -- Confidence at major Japanese manufacturers has slumped to an almost five-year low and large corporations project a significant drop in profits for the half-year through September, a key central bank survey showed Tuesday.
But other sections in the quarterly report, which polls more than 10,000 companies, suggested pockets of strength have so far cushioned Japan's economic slowdown.
The closely watched "tankan" survey showed that the confidence index for large manufacturers' business sentiment fell to 5 in June from 11 in March. The figure represents the percentage of companies saying business conditions are good minus those saying conditions are bad.
Although it was the third straight quarterly drop and the worst reading since September 2003, the headline figure was better than market expectations of between 2 and 4. It also remained above zero -- meaning that major manufacturers as a whole are marginally more optimistic than pessimistic.
The report portrayed a mixed picture of the Japanese economy. On the positive side, big companies plan to boost capital expenditure by 2.4 percent in the fiscal year through March 2009, better than the 1.6 percent decrease they estimated in March.
Japanese employers also have more jobs than people to fill them, and large companies report easy financing conditions, the tally showed.
"The latest tankan survey confirms Japan's place in the world as a safe haven from the global risk of stagflation," said Merrill Lynch economist Takuji Okubo in a research memo. "The Japanese economy is stable in either direction."
Still, the deterioration in confidence was broad-based, hitting small firms especially hard. The confidence index for small manufacturers tumbled to minus 10, while the small non-manufacturers' index hit minus 20.
For major non-manufacturers, the sentiment index dipped to 10 from 12 last quarter.
Also troubling was large companies' forecast for a 17.8 percent decline in profits in the fiscal first-half and a 7.0 percent decrease in the fiscal year through March 2009. That outlook suggests that softening U.S. demand and soaring materials costs are sapping earnings at Japan's big auto and electronics exporters.
The benchmark Nikkei 225 stock average, which shed about 6 percent in June, closed down 0.13 percent at 13,463.20 Tuesday for its ninth straight losing session.
Tomoko Fujii, head of economics and strategy for Bank of America in Japan, said the lower profit projection "suggests more painful restructuring measures on capex and labor costs in the pipeline."
Indeed, companies expect business conditions to worsen in the months ahead. The sentiment index for big manufacturers is forecast to drop to four in September, while the figure for large non-manufacturers will likely fall to eight, the tankan showed.
"At this moment, the sentiment deteriorated first," said Kenichi Kawasaki, chief economist at Lehman Brothers in Tokyo. "What we are watching is whether that will spill over to real expenditure activities."
Kawasaki, however, called Japan's downturn "mild" with "very limited risk of the economy going into a serious recession."
The tankan survey, which is taken to help Bank of Japan board members guide monetary policy, added to already strong speculation that the central bank is likely to keep its key interest rate on hold at 0.5 percent for awhile.
The economy isn't strong enough to hike rates in the near future, nor is it weak enough to cut them, said Hitomi Kimura, a fixed-income strategist at JPMorgan Securities in Tokyo.
"It's pretty much neutral to policy," she said.
Managers in the survey said they expect an average dollar value of 102.74 yen during the fiscal year, lower than their previous estimate of 109.21 yen. Tuesday afternoon in Tokyo the dollar was at 105.75 yen.
A strong yen hurts exporters by eroding their overseas earnings and making their products less competitive abroad.
The Bank of Japan surveyed 10,579 companies between May 28 to June 30, of which 98.9 percent responded.