Japan's official survey of business confidence, the Tankan, shows that the country's largest manufacturers are in better heart than expected.

The index of manufacturer sentiment slid to five points in June from 11 in March, a third quarterly decline, the Bank of Japan said today in Tokyo.

But the drop was less than expected and shows the biggest exporters expecting to weather the downturn in US sales and rising input costs.

Large companies said they plan to increase capital spending by 2.4% this year, after saying they would cut investment three months ago.

Japanese exporters are turning to Asia and the booming oil-producing nations of the Gulf and Russia to offset the US retreat.

"Things are reasonably tough in terms of profitability but not so tough in terms of underlying demand," said Richard Jerram, chief economist at Macquarie Securities in Tokyo.

"In some ways, this is why people have been mistakenly pessimistic on the state of the economy."

The large manufacturer index plunged to minus 51 in 1998, when Asia was in the throes of a currency crisis and the government had to buy failed lenders including Long-Term Credit Bank of Japan.