Business confidence in most sectors has plunged sharply and may slip further, according to the Bank of Japan's quarterly "tankan" survey of business sentiment released Monday.

The deepening pessimism reflects not only stagnant consumption and housing investment following the consumption tax hike in April, but also the collapse of major financial institutions and Asia's financial crises. Firms also face difficulties in borrowing money from banks, which are trying to shrink their assets, according to the survey.

The diffusion index for major manufacturers, which have led the economy since April, plunged from 3 in September to minus 11 in the latest report. In the last report, the firms had predicted the index would only fall to plus 1. The confidence of major nonmanufacturers continued to fall as well, with the index dropping 5 points from the previous survey to end at minus 20.

Among small companies, the index for manufacturers dropped 8 points from September to end at minus 21, while that for small nonmanufacturers fell 7 points to hit minus 25.

Diffusion indexes are calculated by subtracting the percentage of companies that believe current business conditions are unfavorable from the percentage of firms with a positive outlook. The diffusion indexes for all four survey categories -- large and small manufacturers and nonmanufacturers -- turned negative simultaneously for the first time since August 1996.

The survey covered 9,359 firms, including 706 companies defined as major firms by the BOJ and 5,395 small companies. The rest are large and medium-size firms whose data are not reflected in the business confidence index. The target firms responded between the mid-November and Dec. 12. During the period, Hokkaido Takushoku Bank, the 10th-largest city bank, and Yamaichi Securities Co., one of Japan's Big Four brokerages, collapsed.

"The decline in business sentiment was amplified by the financial institutions' failures and the worsening situation in Asia," said Masayuki Matsushima, head of the BOJ's Research and Statistics Bureau.

Large firms in leading industries were no exception to the gloomy mood. The index for car manufacturers declined 21 points to minus 10, while that for electrical machinery makers dropped 14 points to minus 3. Major retailers, already hit hard by the consumption tax hike, posted a 21-point plunge to minus 55.

Firms in all four categories revised their sales and current profits for fiscal 1997 downward from the previous survey. Major nonmanufacturers and small manufacturers switched their forecasts from positive to negative. However, major exporters, blessed by a weakening yen, raised their sales forecasts by 3 percentage points to year-on-year growth of 11 percent.

Regarding corporate finance, the survey showed more firms are facing growing reluctance from financial institutions to lend money. The index of firms' lending attitudes -- calculated in a method similar to that of business confidence -- fell 16 points to 3 for major corporations and 10 points to minus 1 for small firms. The negative figure means there were more firms that thought banks were being tight-fisted than those that thought banks as being lenient.

The 16-point drop for large firms was the sharpest since November 1990, when the index plunged by 27 points. "This shows unprecedented severity in corporate financing during a period of monetary easing," Matsushima told a morning news conference. The result reflects a change in behavior among financial institutions, which have tightened control over credit risks and shifted their emphasis more toward profits, he added.

But BOJ's Matsushima said the undertone of corporate earnings and fixed investment is still firm, especially among large manufacturers. The BOJ will closely monitor whether the positive circulating mechanism of production, income and spending functions properly, he added.

Takahashi said a considerable inventory stockpile may drive production lower in the January-March period. The real growth rate of the gross domestic product will probably end up on the negative side for fiscal 1997, which ends next March, the economist said. He also predicted the rate will remain below zero in fiscal 1998 if a change in policy is not made, adding, "I think that risk is high."

The government should adopt a comprehensive package of fast-working structural reform measures, he said. The package should include radical cuts in corporate and income taxes, as well as housing-loan-related deductions worth 10 trillion yen for two years, he said. "Tax cuts are needed now even with the issuance of government bonds," Takahashi said.

Akiyoshi Takumori, chief economist at Sakura Securities Co., said the dismal results of the tankan were obviously caused by concerns in the financial system. The survey indicated more firms believe interest rates on borrowing will rise toward March, meaning banks will become more selective in lending. Yet he is optimistic about 1998, saying the economy may improve after spring because firms do not have overly excessive production capacities or inventories, a view opposite to Takahashi's.