Japan business mood subdued amid fears of global slowdown - Reuters Tankan

By Tetsushi Kajimoto and Izumi Nakagawa

TOKYO (Reuters) - Confidence at Japanese manufacturers remained largely subdued in February and the mood was seen deteriorating over the coming three months, a Reuters poll showed, highlighting concerns about slowing global growth and turbulent markets.

In a sign of the stiff headwinds dragging on growth in the world's third-largest economy, service-sector sentiment also soured though it was expected to stabilise somewhat in the near term, the Reuters Tankan showed.

The monthly poll, which strongly correlates with the Bank of Japan's quarterly tankan survey, suggested the economy remains underpowered after declines in exports and consumer spending led to a contraction in output in the fourth quarter.

The Reuters Tankan sentiment index for manufacturers inched up to 7 in February from 6 in January, helped by gains in food processing and precision machinery industries, while cars, steel and oil refineries sagged. It is seen falling to 4 in May.

"The results showed gradual worsening of corporate sentiment as declines in demand have become more evident after markets turned into a risk-off mode," said Mari Iwashita, chief market economist at SMBC Friend Securities.

"There's no driver of growth. If domestic demand remains lacklustre on top of weak exports, that could mount pressure on not just the BOJ but the government to respond by taking fresh stimulus steps," she said.

The poll of 513 big and mid-sized Japanese companies between Feb. 1-16, of which 265 responded, was taken at a time when heightened global risk aversion shook up the yen. The safe-haven Japanese currency rose sharply, hurting exporters' morale as the dollar fell to a 15-month low below 111 yen last week.

HEADWINDS

Japan's economy contracted by an annualised 1.4 percent in October-December as private consumption and exports slumped. While analysts expect a moderate recovery, stagnant wages, depressed consumer prices and faltering global growth have raised fresh doubts about Prime Minister Shinzo Abe's cocktail of stimulus policies aimed at quashing years of deflation.

Even the central bank's shock adoption of negative interest rates late last month has hardly helped turn around business sentiment, as it failed to boost Tokyo stock prices or weaken the yen.

"Demand from China has slowed a lot and there are signs of demand for some semiconductor-related parts declining," a manager at a rubber maker said in the survey.

An electric machinery producer said: "Our business results stand at the previous year's levels but have somewhat fallen short of our estimate. Yen rises could aggravate the situation."

The service sector index fell to 21 from 27 in January, weighed by retailers and wholesalers. The index is seen unchanged in the next three months.

(Reporting by Tetsushi Kajimoto and Izumi Nakagawa; Editing by Shri Navaratnam)