A key central bank survey showed on Thursday that confidence at major Japanese manufacturers fell over the last quarter, as the export-reliant country battled a strong yen and an increasingly precarious global economy.

In the Bank of Japan’s “tankan” survey of business sentiment, the main index for big manufacturers fell to minus 4, in the first deterioration in two quarters. Three months ago, it stood at 2.

The figure represents the per centage of companies saying business conditions are good minus those saying conditions are unfavourable, with 100 representing the best mood and minus 100 the worst.

The result is slightly worse than Kyodo News agency’s average market forecast for a reading of minus 2.

Large manufacturers also don’t expect to feel better anytime soon. The central bank forecasts the index to fall to minus 5 over the next three months.

Japan has been battling a strong yen, which has hit multiple historic highs this year against the dollar. Amid Europe’s debt problems and economic uncertainty in the U.S., global investors have looked to the Japanese currency as a relatively safe haven.

But Japan relies on exports to drive growth, and the yen’s appreciation has hit companies such as Toyota Motor Corp. and Sony Corp. hard. When the yen climbs, it reduces the value of exporters’ overseas profits when repatriated to Japan.

That has forced companies to shift more production overseas, prompting worries about a hollowing out of Japanese industry.

The most pessimistic of the big manufacturing group was the electrical machinery sector including audio and video equipment which tumbled to minus 21 from minus 5. Companies doing business in petroleum products and heavy machinery also recorded big declines.

The auto industry, however, showed surprising resilience. Its index jumped seven points to 20, despite the yen and recent parts supply problems due to the flooding in Thailand.

Big non-manufacturers were feeling more optimistic as well. Their confidence index rose to 4 from 1 three months earlier.

The reading for medium-sized manufacturers was flat at minus 3, while the small manufacturers index improved to minus 8, up from minus 11.

The survey, which helps guide monetary policy, showed that large companies overall plan to boost capital spending by 1.4 per cent this fiscal year through March 2012. The figure is down from 3 per cent in the September survey.

Large manufacturing companies assume an average exchange rate of 79.02 yen per dollar for this fiscal year, compared with 81.15 yen three months ago.

Big companies expect profits to retreat 9 per cent this fiscal year after jumping 46 per cent last year.

The Bank of Japan surveyed 10,846 companies nationwide. About 99 per cent responded.

The bank’s next policy board meeting is scheduled for Tuesday and Wednesday.

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