TOKYO (AP) -- Japanese companies are gaining confidence in the global recovery, but an uncertain outlook at home is fueling a worrisome retreat in corporate spending, a key central bank report showed Monday.
In the Bank of Japan's closely watched "tankan" quarterly survey of business sentiment, the main index for large manufacturers stood at minus 24, a nine-point improvement from three months ago. The figure represents the percentage of companies saying business conditions are good minus those saying conditions are unfavorable.
The result beat Kyodo News agency's average market forecast of minus 27 and reflects how robust Asian demand is bolstering the world's second-biggest economy. The fine print, however, paints a less encouraging picture.
Amid deflation and a strong yen, companies remain reluctant to invest in factories, equipment or workers.
Major manufacturers and non-manufacturers plan deeper capital spending cuts of 13.8 percent this fiscal year through March 2010, according to the tankan. They say they still have too many workers and capacity. And while big companies expect sentiment to improve next quarter, small and medium-size firms forecast deterioration amid a frail domestic economy.
"Strong Asian demand is driving the Japanese economy through exports, and larger manufacturers are to some extent benefiting from that," said Masayuki Kichikawa, chief economist at Bank of America Merrill Lynch in Tokyo. "But today's numbers confirmed a divergence in business sentiment."
In other words, the big companies are getting stronger, while the smaller ones are faltering.
The main culprit appears to be deflation. Falling prices plagued Japan during its "Lost Decade" in the 1990s and once again threatens to undermine the country's recovery. Deflation can hamper economic growth by depressing company profits, sparking wage cuts and causing consumers to postpone purchases. It also can increase debt burdens.
A strong yen is adding further pressure to companies of all sizes by eroding the overseas profits of exporters like Sony Corp. and Toyota Motor Corp. The Japanese currency hit a 14-year high of 84.83 against the dollar on Nov. 27. The dollar has recovered somewhat since then, trading above 89 yen Monday morning.
The Cabinet top spokesman, Hirofumi Hirano, welcomed the better tankan numbers. But he said the government, which last week announced a 7.2 trillion yen ($81 billion) stimulus package, will keep close watch on economic developments.
"In reality, we need to regard the prospects as still severe," Hirano said, according to Kyodo.
Responding to calls for action, the Bank of Japan convened an emergency meeting earlier this month and established a new lending facility to boost liquidity.
The tankan helps the central bank guide monetary policy, and analysts said the latest survey could prompt further steps when the policy board meets later this week.
"Political pressure from the government is likely to increase and, we think, the Bank of Japan will be finally forced to take easing measures in a concerted effort to combat deflation," said Junko Nishioka, chief economist at RBS Securities Japan, in a note to clients.
The sentiment index for big non-manufacturers inched up to minus 22 from minus 24 in September.
Sentiment among medium-sized manufacturers stood at minus 30 from minus 40, while the reading for small manufacturers was up slightly to 40 from minus 52 in September.
Companies are assuming that the dollar will average 92.93 yen this fiscal year. Big manufacturers expect pretax profits to fall 34.7 percent.
The Bank of Japan surveyed a total of 10,116 companies between Nov. 9 and Dec. 11, of which more than 99 percent responded.