Business confidence at large manufacturers rose to a two-year high in the three months through September, according to the Bank of Japan’s latest “tankan” survey, despite forecasts by economists it would either remain flat or slightly decline.

The BOJ said Monday its business sentiment index rose for the second straight quarter, increasing to 24 for large manufacturers from 21 in July — the highest rise since September 2004, when the index hit 26. Business sectors including industrial machinery, electrical machinery, and iron and steel helped push up the figures.

However, large manufacturers appeared to be less confident about the coming quarter. In the three months to December, the index is projected at 21, down 3 points from the current index. Many economists expect business in the United States to continue to slow, dealing a negative blow to Japan’s economy.

The tankan report boosted investors’ confidence in the economy, sending the 225-issue Nikkei stock average to a four-week high Monday, closing at 16,254.29.

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

Big companies in all industries are planning to increase capital investment in fiscal 2006 by an average of 11.5 percent from fiscal 2005 — the biggest increase since fiscal 1990. The figure is 16.9 percent for large manufacturers, pushing up the trend.

Eisuke Suzuki, an economist at Development Bank of Japan, pointed out that business sentiment at large manufacturers improved due to the weaker yen against the dollar and a steady increase of capital investment plans in the next fiscal year.

“The business sentiment index scored higher than what the market has projected and output prices turned to positive,” Suzuki said in a report. “It will give the BOJ positive data for raising its interest rate again.”

The output price index for large manufacturers registered 2, up from minus 3 in the last tankan. It is the first time the index turned positive since February 1991. The output price index stood at 0 for large nonmanufacturers, recovering from minus 3.

“The figures clearly show (the economy) is no longer in deflation,” Suzuki said.

Monday’s tankan is the first since the BOJ abolished its “zero-interest-rate” policy in July. The market is watching closely for when the central bank may initiate the next hike.

The survey showed that sentiment in midsize and small companies, which comprise about half the firms surveyed, is still volatile compared with larger enterprises.

The business sentiment index among midsize and small manufacturers decreased to 6 from 7 in the last survey. As for midsize- and small nonmanufacturers, the index registered minus 8, down from minus 6 in the survey released in July.

The BOJ conducted the quarterly survey from Aug. 30 to Sept. 29, covering about 10,000 companies.

During a news conference, Chief Cabinet Secretary Yasuhisa Shiozaki expressed concern on the confidence of midsize and small enterprises.

“I have that impression that (the business of) midsize and small companies could be better,” said Shiozaki, a former BOJ official. “But in general, the economy is recovering and businesses are enjoying a good cycle.”

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