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Sentiment among Japan’s largest manufacturers deteriorated more than economists expected, underscoring the fragility of a post-quake recovery.

The Tankan large manufacturer index fell to minus 4 from 2, the Bank of Japan (8301) said today in Tokyo. The median estimate of 24 economists surveyed by Bloomberg News was for a reading of minus 2. A negative number indicates that pessimists outnumber optimists.

Executives said their sentiment will worsen further into 2012 as an appreciating currency and Europe’s debt crisis threaten profits at companies from Toyota Motor Corp. (7203) to TDK Corp. (6762) Half of the analysts in a Bloomberg News survey forecast that the economy will contract this quarter, bolstering the case for more stimulus from the central bank.

“This clearly shows that the economy is getting worse and it was surprising to see that the outlook is bleaker,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo and a former BOJ official. “If sentiment keeps worsening and raises the chance of Japan falling into a recession, the BOJ will have to take more decisive action rather than simply buying more assets.”

The yen traded at 78.07 against the dollar at 10:10 a.m. in Tokyo, from 78.12 before the report. Japan’s currency reached a post World War II high of 75.35 per dollar on Oct. 31 and companies surveyed by the central bank said they expect it to trade at 79.02 for the year ending March 31.

Conditions Deteriorating

Large manufacturers see conditions deteriorating in coming months, predicting confidence will fall to minus 5 next quarter. In a sign that domestic industries have been shielded from global turmoil, large service providers became more optimistic in December, with sentiment rising to 4 from 1, the report showed. They see the index falling to zero in March.

Japan’s gross domestic product grew an annualized 5.6 percent in the three months ended September as demand picked up after the March 11 temblor. That pace that will probably slow to 0.42 percent this quarter as exports and capital spending cool, according to the median estimate of 11 economists surveyed by Bloomberg News. Of the 10 surveyed this month, five predict GDP will shrink.

Large manufacturers predicted a 6.7 percent drop in current profit for the year ending March 31 to reflect an anticipated slump in demand in the second half of the period. Capital spending by all large companies will increase 1.4 percent, less than economists forecasts for a 2.5 percent increase.

Job Cuts

TDK, the world’s biggest maker of magnetic heads for disk drives, is among companies cutting jobs, while Panasonic Corp. (6752) has picked Malaysia as the site for a solar-cell plant, to hedge against currency risks.

At Toyota, poised to lose its crown as the world’s largest automaker, currency gains have forced price increases, threatening to further erode global market share after production disruptions from the temblor and floods in Thailand.

“We raised prices of some our models on the high yen, and this is very difficult for us to admit, but we expect a drop in sales from this,” Satoshi Ozawa, chief financial officer at Toyota, said this month. “Still, the yen is too strong, and we had to sacrifice some unit sales.”

The Bank of Japan expanded asset purchases to 55 trillion yen ($704 billion) in October, a move that failed to weaken the yen from a then record high. The Finance Ministry ordered an unprecedented amount of yen sales less than a week later, and Finance Minister Jun Azumi has repeatedly pledged to act against speculative foreign-exchange moves.

BOJ Concern

Central bank officials have signaled growing concern at the spillovers from Europe’s sovereign-debt turmoil, with Governor Masaaki Shirakawa warning that exports face a “severe” outlook and highlighting the risk that yen gains induced by the crisis will damp growth.

Board members begin a two-day meeting on Dec. 20 in which they will set the benchmark interest rate, currently near zero, in addition to the size of lending programs and a fund that buys securities including Japanese government bonds.

“Major economies are likely to move forward with a defacto coordinated easing effort as early as the beginning of next year,” Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo, wrote in a Dec. 6 note. “The Bank of Japan is likely to add another 5 trillion yen to its asset fund by the end of March.”

Azumi is compiling a fourth extra budget as the odds of sustained expansion increasingly hinge on government spending. Prime Minister Yoshihiko Noda told reporters this month that he ordered the additional spending to “secure the public’s peace of mind.”

Today’s Tankan survey, issued quarterly by the central bank, is the most closely watched gauge of corporate confidence. The central bank surveyed more than 10,000 companies between Nov. 14 and Dec. 14.

To contact the reporters on this story: Aki Ito in Tokyo at; Eleanor Warnock in Tokyo at

To contact the editor responsible for this story: Paul Panckhurst at