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Manufacturing outlook stays gloomy

Japanese manufacturers remain gloomy over high oil prices, the strong yen and weaker growth in Asia, according to a quarterly central bank survey which defied expectations that business confidence was improving in the world's third-largest economy.

The Bank of Japan's quarterly "tankan" reported that the main index for big manufacturers was at minus four for the January-March quarter, unchanged from the last quarter of 2011.

A negative reading indicates greater pessimism than optimism among those surveyed. Many analysts had forecast an improvement to minus one, given easing concerns over the crisis in Europe and signs of a rebound in production following last year's disasters.

Higher costs for energy will further undermine the competitiveness and profits of Japanese manufacturers at a time of uncertainty for growth in Asia - an increasingly strong factor for Japan given the weakness in the US and European markets.

"It's not only high oil prices, but overall commodity prices are increasing, and those overall widely affect business conditions," said Junko Nishioka, an economist at RBS Japan Securities. "Even though export conditions will improve from now on, it's difficult to anticipate that business conditions will improve very soon," she said.

Data released last week showed weaker than expected factory production in February, with industrial output falling 1.2%, underscoring the fragility of the economic recovery as growth in Asia slows.

Conditions had been seen as improving thanks to a recovery from the disruptions caused by widespread flooding in Thailand last year, on top of Japan's earthquake, tsunami and nuclear disasters.

"Looking forward, there is some uncertainty," said said Masayuki Kichikawa, an economist at Bank of America-Merrill Lynch. Given Japan's heavy reliance on exports, much depends on conditions elsewhere in Asia. "It's a little too early to judge so companies are likely to show some cautiousness in their judgment," Kichikawa said.

Exporters are struggling with the strong yen, which surged to post-Second World War highs against the dollar as the US central bank pursued stimulus policies that contributed to a weaker greenback. When the yen climbs, it reduces the value of exporters' overseas profits when repatriated to Japan.

The survey forecasts business sentiment among large manufacturers to rise only marginally to minus three over the next quarter. Medium-sized and small manufacturers expect business conditions to deteriorate. "As long as the large manufacturers are at a low level ... it is unlikely that the small and medium-size business activity will recover in the near future," Ms Nishioka said.

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