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Business confidence at Japan’s large manufacturers deteriorated sharply in the January-March quarter.

According to the Bank of Japan’s “tankan” survey released Friday, the outlook for the next quarter remains cautious.

A slower-than-expected recovery in the information technology sector and high oil prices dented corporate sentiment, despite hopes that the country’s economy would soon shake itself out of its lull, economists said.

“Today’s tankan became the final blow to expectations that the economy would recover rapidly,” said Yasunari Ueno, chief market economist at Mizuho Securities Co.

In the quarterly survey by the central bank, the business confidence index for large manufacturers was 14, down for the second consecutive quarter and the lowest level in the past year.

The index represents the percentage of companies reporting good conditions minus those reporting the opposite.

The index was 22 in the previous quarter, when it fell for the first time in 21 months. The index for June is expected to remain unchanged at 14.

But economists said future prospects were not expected to be bleak, given solid demand in capital spending and the workforce.

Big manufacturers plan to spend 3.4 percent more on capital investment in fiscal 2005 than in the just-ended year, according to the tankan. The new fiscal year began Friday. The number of employees at all enterprises surveyed rose 0.9 percent from a year earlier as of the end of December.

“The outcome showed that companies are aggressively pursuing competitiveness, after limiting capital investments and employees while the economy was in a deflationary state in 2003,” said Seiji Adachi, senior economist at Deutsche Securities Ltd.

The index for large electrical machinery manufacturers — one of the engines driving the recent economic upturn — slid to minus 3 from 11.

This figure, at its lowest level since September 2003, indicated that the inventories of IT devices, which have hovered at high levels in recent months, did not decline as much as many economists had expected, partly because China’s slower economic growth hurt exports, analysts said.

“How long it will take the economy to get back on a recovery course depends on inventory adjustment and the strength of exports,” said Katsuhiro Oshima, economist at Mitsubishi Research Institute Inc.

High crude oil prices meanwhile dampened sentiment in such sectors as ceramics, and pulp and paper.

Crude oil prices rose close to $54 a barrel by the end of March, up from $51.39 a barrel when the survey started on Feb. 24, BOJ officials said.

The deterioration in large manufacturers’ sentiment was echoed by that of their smaller counterparts. The index for small manufacturers was zero, down from 5 in the previous quarter and the first decline in 12 quarters.

Their outlook for the next quarter is even more bleak, at minus 2.

The index for large nonmanufacturers was 11, unchanged from the previous quarter. The index for small nonmanufacturers remained unchanged at minus 14.

The figure for the wholesale and transportation sectors fell amid slackened exports, while the transportation industry was further hit by high oil prices.

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