Tokyo - Japan is facing slowing economic growth as the shock waves from global financial turmoil finally shake the foundations of its economy.

While some economic indicators have been revised down, economists say the negative impact on Japan is unlikely to be as great as in other countries. Japan's situation is serious, but not life- threatening, they say.

Although Japan's economic growth is slowing, Japan can avoid "a serious setback," said Takahide Kiuchi, chief economist at Nomura Securities Co.

In the meantime, with Japan relying heavily on exports, signs have started to emerge of the impact on the world's second biggest economy of the US slowdown, the recent surge in the yen, the jump in oil prices and stock market turbulence.

Japan's leading economic indicator released last week underscored the downbeat outlook for the country with the economic mood among the nation's major manufacturers slipping for the second time in a row in the first three months of the year.

Confidence among large manufacturers fell to 11 from 19 while sentiment among major non-manufacturers dropped to 12 from 16, according to the Bank of Japan's closely watched Tankan survey.

All industries expect to spend 5.3 per cent less on plant and equipment in 2008 compared to the same period last year, the Tankan survey said. This is the lowest since
2002.

In the wake of the business sentiment index, the Tokyo-based central bank is considering revising down its economic growth rate projection for this year to 1 per cent, effectively halving its previous forecast of 2.1 per cent.

Analysts expect the central bank to either cut the interest rate by 0.25 percentage points or maintain the current 0.5 per cent in the coming weeks.

Last month, the Japanese government cut the nation's economic growth to an annualized real 3.5 per cent in the October-December quarter after initially projecting a
3.7-per-cent rise.

Since then, the nation's economic ministers have warned of the downside risks to the Japanese economy as global economic uncertainty grows on the back of US recession fears, the fragile mood among global investors and record-high oil prices.

"We should pay full attention to increasing downside risks," Economic and Fiscal Policy Minister Hiroko Ota recently told a press conference.

But the factors behind the economic setback are limited to external forces, in particular to those parts of the economy that are closely tied to the economic state of the United States, Nomura Securities' Kiuchi said.

Japan's trading partners have diversified over the years, with exports to the US representing only 23 per cent of total Japanese exports, according to Yukio Noguchi, finance professor at Waseda University.

"Japan is more dependent on Asian countries for trade than the US," said Robert Feldman of Morgan Stanley in Tokyo.

"As long as China and India are doing okay, the slowdown in the US has less impact (on Japan) than it would on Latin America or Europe," he said.

That said, however, looming large over Japan's key export machine is the threat posed by the strong yen, with the US dollar sinking last month below the 100-yen level for the first time in more than 12 years.

As a sign of the fallout from a strong yen for Japan's industry, it has been estimated that giant Japanese carmaker Toyota Motor Co's profit would drop 35 billion yen
(348.45 million dollars) if the US dollar fell one yen from 100 yen to 99.

The yen's rise in the last weeks has already contributed to the recent shakeout in Japanese stocks with Tokyo's benchmark Nikkei average index plunging to the 12,000 level last month.

But Eisuke Sakakibara, a former Japanese Finance Ministry official and once known as Mr Yen, told business weekly Shukan Diamond that the fall in stock prices did not mean that Japanese companies had lost competitiveness.

In the meantime, Japanese industry remains hopeful that the nation's economic growth will regain momentum as the world's economy manages to lay aside the financial crisis possibly as the new year gets underway.

Despite the current economic concerns, Japanese businesses are retaining their mid-term optimistic profit forecasts.

Companies across Japanese industry expect profits to decline 1.9 per cent in the first six months but to rise 7 per cent in the last six months of the year that ends in March
2009.

But after the longest economic expansion in Japan's post-Second World War history, most analysts believe it is unlikely that the country will be dragged into a serious economic recession as a result of the current upheaval gripping the international economy. (dpa)