Big Japanese firms have grown pessimistic about business conditions, a government survey showed on Monday, fueling concern that the Japanese economy may follow the United States into a recession.
The survey reinforced expectations that the Bank of Japan's closely watched tankan survey due out on April 1 will show a broad slide in the business mood.
"Sentiment has gotten much worse for both big and small firms. They expect conditions to improve somewhat ahead, but the survey was conducted before currency and stock prices moved rapidly," Takeshi Minami, chief economist at Norinchukin Research Institute.
"The Bank of Japan's tankan survey due out next month, which will reflect the impact of such market moves, will likely show sentiment worsening significantly."
The business survey index of sentiment at large manufacturers slumped to minus 12.9 for January-March from plus 5.2 in October-December in a joint survey by the Ministry of Finance and the Economic and Social Research Institute, an arm of the Cabinet Office.
The index readings for January-March were the lowest in all categories since the data began in April-June 2002.
But the markets shrugged off the numbers, which were seen as confirming a weakness already reflected in other recent data.
The business malaise comes amid a slide in support for Japanese Prime Minister Yasuo Fukuda due in large part to a political standoff that has left the central bank governor's post vacant for the first time in more than 80 years.
A newspaper poll published on Monday showed that support for the prime minister had fallen to 31 percent, down nine percentage points from a month ago.
The survey's index reading at large non-manufacturers fell to minus 7.2 from minus 2.2 last quarter, while that at big firms overall was down at minus 9.3 against plus 0.5 in October-December.
The indexes measure the percentage of firms that expect the business environment to improve minus the percentage that expect it to worsen.
Rising raw material costs and uncertainty over the global economy seemed to have hurt the business mood, a finance ministry official said.
A Reuters survey last week showed Japanese manufacturers' sentiment slipped to a four-year low in March, battered by high raw materials costs, slack domestic demand, the dollar's fall and worries over the U.S. economic outlook.
Japan's economy, driven by solid exports, grew 0.9 percent in the last three months of 2007, despite economists' expectations for much slower growth.
Although shipments to the United States have been slowing since the credit turmoil unfolded, exports to China and other developing countries have been unfettered.
But economists say deepening financial market problems could spell trouble for global economic growth, which Japan relies on heavily.
Domestic consumption has been tepid as wages have been kept in check, and though domestic housing investment appeared to have bottomed after a slump following the start of tighter building rules last June, uncertainty remains on the strength and the pace of its recovery.
Although many economists expect Japan to narrowly avoid a recession, some say it is already in recession and the Bank of Japan may have to cut interest rates later this year.
"The weak figures (in corporate sentiment) reflect growing concern about a U.S. recession and turbulence in financial markets. It underscores our view that Japan and the United States will go through a mini recession," said a Morgan Stanley economist, Takehiro Sato.
Swap contracts on the overnight call rate, the BOJ's policy target, are pricing in around a 30 percent chance of a rate cut by June.