Confidence among major manufacturers dropped unexpectedly — albeit slightly — in the first quarter of the year due to high oil prices, marking the first decline in four quarters, according to the Bank of Japan’s closely watched “tankan” survey released Monday.

However, despite a temporary slump in sectors dealing in raw materials such as fibers, paper and pulp, the survey indicates the nation is still following the mild growth track it has been on since February 2002. Big companies in all industries are planning to increase capital investment in fiscal 2006 by an average 2.7 percent from fiscal 2005 — the biggest increase since fiscal 1990 at the start of a new fiscal year.

If the expansion continues through April, the economy will have grown 51 consecutive months — a statistic the media is using to compare the deflation-plagued economy with the asset-inflated bubble economy of the late 1980s. If it continues through November, it will surpass the postwar record of 57 months set during the “Izanagi economy” that began in late 1965, the government says.

The central bank said its business sentiment index, subtracting the percentage of companies reporting unfavorable conditions from those reporting favorable conditions, declined to 20 from 21 in December for big manufacturers. The fall came against the average market projection of 23.

The survey was conducted between Feb. 27 and last Friday on 10,087 companies, of which 98 percent responded.

The diffusion index for major nonmanufacturers registered 18, up from 17 in the previous survey and posting the second consecutive quarterly improvement. The result matched the average market projection of 18.

For the April-June quarter, the index is projected to rise again to 22 for large manufacturers, and to 19 for major nonmanufacturers.

“Looking at the tankan, the overall corporate business sentiment remained flat for now, and is expected to improve slightly,” Chief Cabinet Secretary Shinzo Abe told reporters, underscoring the need for the government to continue to combat deflation.

The survey “is considered to follow the trend and (government) recognition that the economy is recovering,” he said.

By sector, manufacturers of automobiles and electrical machinery have been performing well, while those in fabric, pulp and paper have suffered a slump as they failed to offset surging oil prices in their products.

Rising share prices and bullish business sentiment are expected to prompt the central bank to raise short-term interest rates earlier than the initially expected October, analysts said.

According to the BOJ, the business sentiment index for midsize and small manufacturers came to 7 in March, unchanged from December, and that for their nonmanufacturing counterparts was minus 9, compared with minus 7 in the previous poll.

Large manufacturers plan to spend 4.8 percent more in capital investment in the current fiscal year than in fiscal 2005. Midsize and small companies said they will invest 16.1 percent less in the current fiscal year.

The quarterly survey also suggested that more companies than in the previous poll are experiencing a labor shortage, raising hopes that employment conditions will improve in line with the economic upswing.

The diffusion index for employment conditions at big companies in all industries registered minus 6, compared with minus 2 in December, and is projected to remain unchanged at minus 6 in the three months through June.

The index is calculated by subtracting the percentage of companies reporting a shortage of labor from the percentage of companies reporting having an excess.

Information from Kyodo added

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