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Business confidence among major manufacturers improved in the April-June quarter and fiscal 2006 corporate capital spending is expected to post double-digit growth, the Bank of Japan’s “tankan” survey showed Monday, increasing the likelihood that the central bank will raise the key short-term interest rate in July.

The BOJ said its business sentiment index came to 21 for large manufacturers, compared with 20 in March. The reading is in line with the average market projection of 21.

The index for major nonmanufacturers rose to 20 from 18 in the previous survey. It is the highest reading since the index hit 20 in February 1992.

The indexes represent the percentage of companies reporting favorable business conditions minus the percentage of those reporting unfavorable conditions.

For the three months to September, the index for large manufacturers is projected to rise to 22, and that for major nonmanufacturers is forecast to increase to 21.

Large companies in all industries plan to spend 11.6 percent more on plants and equipment in fiscal 2006 than in fiscal 2005, the highest growth since fiscal 1990 and revised upward from the 2.7 percent increase projected in March.

Midsize and small companies project they will invest 11.0 percent less in the current fiscal year to next March, an improvement from the 16.1 percent cut they envisaged in March, according to the survey.

Analysts said the strong tankan data mean the BOJ is likely to raise the unsecured overnight call money rate from zero in its July 13-14 policymaking meeting.

Market players believe the central bank will scrap its “zero-interest-rate” policy soon, regardless of sharp criticism from the public and political circles over BOJ Gov. Toshihiko Fukui’s controversial investment in the scandal-hit Murakami fund.

“There is almost no doubt that the BOJ will ditch the zero-interest-rate policy, as capital investment plans were revised sharply upward,” said Seiji Adachi, senior economist at Deutsche Securities Ltd.

Adachi noted that senior BOJ officials have warned that maintaining the super-easy monetary stance could trigger excessive business investment and result in volatile changes in economic activity, and the June tankan is in line with such a scenario.

“If the BOJ postpones the rate hike in July, it will be regarded as yielding to political pressure, and I think the central bank will raise the overnight call rate by 0.25 percentage point,” Adachi said.

To check the BOJ move, Chief Cabinet Secretary Shinzo Abe urged the central bank Monday to maintain its ultraloose monetary policy.

He told a news conference that the BOJ must keep the present monetary stance “for the time being” to support the recovery from the financial side. The government sees the current recovery still volatile.

Fukui has been under fire after he revealed in the Diet last month that he invested 10 million yen in 1999, when he was chairman of a private think tank, in a fund founded by financier Yoshiaki Murakami, and kept the money there after he became BOJ chief in 2003.

Murakami was arrested June 5 and charged June 23 with insider trading.

Documents presented by Fukui to the Diet on June 20 showed his investment in the Murakami fund had more than doubled to 22.31 million yen by the end of last December.

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