By Jason Clenfield

June 23 (Bloomberg) -- The Bank of Japan’s Tankan survey next week will probably show that large manufacturers consider the worst of the recession to be over.

An index of sentiment among large makers of electronics, cars and other goods will rise to minus 43 from a record low of minus 58 in March, economists predict the report will show on July 1. A negative number means pessimists outnumber optimists.

“We’re seeing a rebound from rock bottom,” said Jan Lambregts, head of financial markets research at Rabobank International in Hong Kong. “For businesses it’s not Armageddon anymore, but it’s still a tough environment.”

Some $2.2 trillion in stimulus worldwide helped stabilize overseas sales for companies from Nissan Motor Co. to Teijin Ltd., and leaner inventories allowed manufacturers such as Nippon Steel Corp. to raise production. Still, companies saddled with idle factories and falling profits are likely to cut investments and jobs, limiting the scope of a recovery.

Analysts surveyed by Bloomberg predict the economy will resume growth in the three months ending June 30 after last quarter’s record 14.2 percent annualized contraction. The Nikkei 225 Stock Average has surged 39 percent since dropping to a 26-year low on March 10 on speculation the country’s deepest postwar slump is abating.

Easing pessimism among Japan’s manufacturers has much do with the outlook for China, where 4 trillion yuan ($586 billion) in government spending is feeding demand for Japan’s heavy equipment, autos and materials.

Nissan, Teijin

Nissan’s sales in China rose 37 percent in April, boosted by a subsidy that halves the consumption tax on small cars. Teijin, a plastics maker, last month resumed full production at its plant near Shanghai and may have to raise domestic output to fill orders, spokesman Tatsuya Inaba said last week.

U.S. President Barack Obama’s stimulus measures are also benefiting Japanese businesses. Mazda Motor Corp. said its U.S. sales will pick up because of the Obama administration’s “cash for clunkers” program that gives as much as $4,500 to consumers who trade in old vehicles for new ones.

Japan’s 25 trillion yen ($260 billion) in extra spending pledged since October has pushed consumer sentiment to a 14- month high. Sales of electronics rose 18 percent since the government last month introduced a program encouraging consumers to buy eco-friendly products, according to Tokyo- based researcher Gfk Marketing Service Japan Ltd.

Easier to Borrow

Nippon Steel plans to use 60 percent of capacity at its biggest mill this month, up from 50 percent previously, as its customers boost output to replace inventories. Japanese companies increased production at the fastest rate in 56 years in April from a month earlier.

Companies are also finding it easier to borrow money as debt markets thaw and the government guarantees more loans. Bankruptcies fell in May for the first time in 11 months. Yields on three-month commercial paper, a source of short-term funds, dropped about four-fifths this year. Sony Corp. raised 220 billion yen this month through its biggest-ever bond sale.

Still, business sentiment at minus 43 would remain worse than at any time during the previous recession in 2002. Exports and output have slumped by more than a third from last year’s levels and, as of April, manufacturers were using only about half of their productive capacity.

‘Nasty Work’

That’s putting pressure on managers to cut jobs and slash investment. Large companies plan to reduce spending by 7 percent in the current business year, the biggest pullback since 2002, economists predict the Tankan survey will show.

“Companies are adjusting to new realities,” said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. “They’re cutting back and reviewing business plans; it’s nasty work and it’s not good for the economy.”

Toyota Motor Corp., expecting its second year of losses, will reduce capital investment by 36 percent this year and cut pay for factory workers by 15 percent. The company estimates it will sell only 6.5 million vehicles this year, less than the 10 million it’s equipped to build.

Sentiment at Japan’s service companies will improve to minus 26 from minus 31, economists said.

A lack of demand has started to weigh on prices, sparking concern the economy may slip back into the deflation that caused wages to fall by about 10 percent in the decade through 2005. Consumer prices fell for a second month in April, wages have slumped for 11 months and companies including supermarket operator Daiei Inc. have lowered prices to entice customers.

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Last Updated: June 22, 2009 11:01 EDT