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Both big manufacturers, services mood down

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China economy also denting sentiment

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Business confidence is key for BOJ's policy outlook path

By Tetsushi Kajimoto

TOKYO, April 17 (Reuters) - Business confidence at big

Japanese manufacturers and services sector firms slid in April

from the prior month, dragged down by cost-of-living pressures

and shaky economic conditions in major market China, a Reuters

monthly poll showed.

The yen's weakening to levels unseen since 1990 during the

heyday of the asset-inflated bubble is lifting the cost of

imports in a blow to household consumption, according to the

Reuters Tankan survey.

Moreover, while the fall currency has boosted the value of

exports, volume of shipments have not benefited as much, the

survey found.

The Reuters Tankan sentiment index for manufacturers stood

at plus 9, down from the previous month's 10, dragged down by

chemicals and food processing.

The services sector index fell to plus 25 from plus 32 in

the previous month, despite some gains by retailers. The survey,

conducted April 3-12, found that both sectors' sentiment indexes

improving slightly over the coming three months.

The monthly Reuters Tankan, which closely tracks the Bank of

Japan's quarterly tankan survey, was conducted during the time

the Japanese currency hit its 34-year lows to the dollar beyond

153 yen. That has prompted repeated warnings from authorities

that they stood ready to take action against speculative or

destabilising currency moves. The dollar broke above 154 yen

this week.

"Our sales appear to be boosted due to the impact of a weak

yen, but there's no sign of recovery in terms of volume," a

manager of a chemicals maker wrote in the survey on condition of

anonymity.

The Reuters Tankan canvassed 497 large non-financial

Japanese firms, of which 235 responded during the survey period.

"Japanese firms on the whole may be riding momentum towards

pay raise, but price hikes have sapped consumers' appetite for

purchasing items such as food and daily goods," wrote a chemical

firm's manager.

On top of the fragile domestic demand, external factors were

also cited as a source of concern for Japanese firms.

"Demand has not stabilised due to delay in China's economic

recovery and uncertainty over the outlook such as decoupling

between U.S. and Chinese economies," a manager of a paper/pulp

maker wrote in the survey on condition of anonymity.

The BOJ's last tankan showed on April 1 services sector

optimism hit a 33-year high in the first quarter on inbound

tourism and rising profits from price hikes. But that was offset

to some extent by same survey's findings of sliding sentiment

for big manufacturers for the first time in four quarters.

On Monday, data showed Japan's core machinery orders - a key

gauge of capital spending - rebounded sharply in a welcome sign

for domestic demand.

Yet, the overall economic impulse so far this year has

pointed to insufficient demand in the economy to mount a robust

recovery in the near term. That's one reason why the Bank of

Japan has flagged a cautious track to further monetary

tightening following its landmark decision to end negative

interest rates last month.

The Reuters Tankan indexes are calculated by subtracting the

share of pessimistic respondents from optimistic ones. A

positive figure means optimists outnumber pessimists.