TOKYO (REUTERS) - Japanese manufacturers' morale slipped in January and is expected to stay subdued over the coming three months, a Reuters poll found, in a sign that fears of a deepening China-led global slowdown and market turmoil are taking their toll on exporter confidence.
The monthly Reuters Tankan, which closely tracks the Bank of Japan's tankan quarterly survey, showed service-sector sentiment improved but was seen falling back again - highlighting the fragility of domestic demand.
"China's slowdown and recent yen gains dampened the processing industries' sentiment. Domestic demand is weak as well, and the economy may have contracted in the last quarter," said Mr Yuichiro Nagai, economist at Barclays Securities.
The poll of 514 big- and mid-sized Japanese companies between Jan 5 and 15, of which 272 responded, was taken as the new year got off to a nervous start due to the collapse of oil and commodity prices, reflecting the slowdown in China and financial market turmoil there.
The loss of confidence could dash policymakers' hope for a virtuous growth cycle of higher incomes and active spending by the private sector, which is needed to pull the economy out of two decades of deflation and stagnation.
"Although shipments to domestic clients slightly rose and US-bound shipments held firm, shipping to Asia remains low and those to China in particular are falling a lot," a manager at a rubber maker said in the survey, which firms answer anonymously.
A manager at an electronics maker said: "Large-scale capital expenditures are declining within and outside Japan. Manufacturers as a whole appear to take a gloomy view of the future."
The Reuters Tankan sentiment index for manufacturers fell to six in January from nine in December, weighed on by exporting industries such as steel, electric machinery and precision machinery. The index is seen unchanged in April.
The service sector index rose to 27 from 18 in December, the first improvement in three months, led by retailers, real estate/construction and information/communications firms. The index is, however, seen falling to 23 in the next three months.
The BOJ tankan, one of the major indicators the central bank scrutinises in guiding monetary policy, showed in December that business mood held steady but it was seen deteriorating three months ahead - reflecting the slowdown in emerging economies.
Japan's economy narrowly dodged a recession in July-September, but analysts have slashed their growth projections for the final quarter, while flagging the risk of a contraction due to weak private consumption and slack capital spending.