TOKYO: Japanese manufacturers are increasingly nervous, a major business survey showed Monday, as sagging demand at home and abroad is compounded by fears over the effects of a nasty territorial spat with China.
The Bank of Japan's quarterly Tankan survey found sentiment among large manufacturers fell to "minus three" in September from "minus one" in June.
The figures represent the percentage of firms saying business conditions are good minus those saying they are bad, and are a key measure used by the BoJ in formulating monetary policy.
Kyohei Morita, chief economist at Barclays Capital, said the latest survey "shows that foreign demand is weak."
"Previous data have shown exports were weaker than expected and domestic consumer spending was recovering slower than expected... but the latest Tankan points to weak foreign demand," he said.
"Towards the end of the year, attention should be paid to how China and other overseas economies will be faring as well as how resilient the domestic economy will be," he said.
Japan's automobile sector was hit by the end of government incentives for consumers to buy energy-saving cars in late September but there still is demand for reconstruction from the 2011 earthquake and tsunami disasters, he said.
Economists expect Japan's economy to have contracted in the July-September quarter but are divided over whether it will sink further in the following quarter.
Morita said he was expecting a little growth in October-December, while Masahiko Hashimoto, an economist at Daiwa Institute of Research, said the risk of two consecutive quarters of contraction -- a recession -- was growing.
"Given the economy is believed to have contracted in July-September, the risk is growing that (Japan is entering) recession unless overseas economies pick up," he said.
European economies are struggling amid the continent's debt problems while the Chinese economy is slowing down despite relatively solid demand from the United States.
Mizuho Securities Research and Consulting senior economist Norio Miyagawa said the survey showed that firms were increasingly pessimistic about the economic outlook, which would make them unwilling to make fresh investments.
"The Tankan survey confirmed that the economy may contract in the October-December period in addition to the July-September quarter, which technically means recession," he told Dow Jones Newswires.
But he added "any contraction will be mild, so I'm not worried about it much." Miyagawa said the non-manufacturing sector showed some firmness with its index at "plus eight."
Economists said any possible impact from Japan's territorial dispute with China was not fully reflected in the September survey, with a majority of companies polled giving answers well ahead of the September 28 deadline.
"If the problem persists there may be additional negative impact on the sentiment of automakers, electrical machinery companies and some retailers and wholesalers" in the next survey, said Morita of Barclays.
Japanese businesses have taken a hit from a flare-up in the row between Tokyo and Beijing over the ownership of islands in the East China Sea.
Japan's nationalisation in September of three islands in the chain, called Senkaku in Japan and Diaoyu in China, triggered anti-Japan rallies across China. Major Japanese companies were forced to close factories temporarily.
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