The confidence among large manufacturers fell to a four year low.  Exporters struggle with the yen rise and the slow growth out of the US.    The index fell to 11 from 19.  The expectations were for a fall to 13.  The Manufacturers Outlook also fell to 7 from 15 last quarter. 

On the Service side, the Non-manufacturers index fell to 12 from 16.  This was as expected.  Finally, the outlook by Non-manufacturers showed a decline to 13.  This was higher than the 10 estimate. 

The large manufacturers index is still well above the negative numbers that occurred during the last Japan recession that ended in 2002.  During that time the index reached a low of -51 and was negative for all but three quarters between December 1997 and June of 2003.  Since June 2003, the index has been positive, reaching a high level of 25 in December 2006.

Overall, the report shows declining growth prospects and will most likely force the BOJ to cut its forecasts for fiscal 2008.  Some analysts feel the Bank of Japan may be inclined to cut rates in 2008 to stimulate growth.  However others feel that Japan businesses are in fairly descent shape given the increase in the yen which makes exports more expensive abroad.  Japanese businesses have benefitted from demand from Asia and Europe who have been less effected by the slowdown that has hit the US consumer. 

The report should support the USDJPY and the yen cross pairs.  There is some modest buying in the pairs since the report was published.