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Japan’s small businesses, the employers of 70 percent of the workforce, signaled that the economy’s export-led revival is too weak to spur spending by companies and consumers.

An index of sentiment at small manufacturers will worsen to minus 42 in March from December’s minus 40, the Bank of Japan’s quarterly Tankan survey showed yesterday. Large companies plan to cut spending 13.8 percent in the year ending March 2010, the second-worst projection on record.

The cost cuts are squeezing suppliers from Toyota Boshoku Corp. to Ichikoh Industries Ltd. and leaving households with less cash to spend in an economy already hobbled by deflation and a surging yen. Prime Minister Yukio Hatoyama had vowed to shift the driver of growth to households from exporters and last week unveiled a 7.2 trillion yen ($81 billion) stimulus package.

“Even though exports are recovering, companies are still cutting costs and hiring, weighing on domestic demand,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “It’s unavoidable that the recovery will stall in the second quarter of next year.”

Large manufacturers expect to be less pessimistic in three months. An index of their confidence will rise for a fourth consecutive quarter to minus 18 from minus 24, the survey showed. Big service companies see sentiment improving to minus 19, while their smaller counterparts expect a deterioration to minus 41. A negative number means pessimists outnumber optimists.

Companies Polarized

“The polarization of confidence between large and small firms is relentless,” said Mari Iwashita, chief market economist at Nikko Cordial Securities Co. in Tokyo. “The government’s economic stimulus will probably stop consumer spending from collapsing and provide some support for small companies too.”

The Nikkei 225 Stock Average has lost 4 percent since Hatoyama’s Democratic Party of Japan won power for the first time on Aug. 30, and the yen has gained more than 5 percent against the dollar, eroding exporters’ profits. The stock index was little changed today, and the Japanese currency traded at 88.92 per the dollar as of 1:57 p.m. in Tokyo from 88.62 yesterday in New York.

Reports in the past month show the economy’s expansion is slowing, prompting Japan to add stimulus measures just as other countries are starting to wind them back.

Growth slowed to 1.3 percent last quarter, about half the pace of the previous three months, when the economy emerged from its worst postwar recession.

Stimulus Plan

Hatoyama’s plan includes employment subsidies, loan guarantees and incentives to buy energy-efficient goods. He has also passed a law to help small borrowers defer loan repayments.

The government’s efforts to bolster household spending over the longer term may fall short because of the country’s demographics, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co one hour payday loan. in Tokyo.

“It’s a bit unrealistic to anticipate the economy can achieve a domestic demand-led expansion, given that the country is rapidly aging and its population is decreasing,” said Muto. “For now, Japan has to depend on exports to drive the economic recovery.”

Household confidence fell in November for the first time this year and wages have slumped for 17 months. Employers will cut winter bonuses by 14.8 percent, the most in at least 31 years, a Nikkei newspaper survey showed last week.

While shipments abroad only account for about 13 percent of the economy, they propelled Japan’s 2002 to 2007 recovery, which was the longest in the postwar era.

Pressure From Exporters

Auto-parts makers are facing pressure from exporters to supply cheaper products.

“Our clients are asking us to cut costs more and we are making our very best efforts to respond,” said Toru Shibata, a spokesman for Toyota Boshoku, an parts maker affiliated with Toyota Motor Corp.

Ichikoh Industries, a maker of lights and rearview mirrors for automobiles, is facing “intense” competition, said company spokesman Motokazu Kaneko. “Unless we come up with ways to cut costs, we can’t win against emerging markets and other overseas competitors.”

Nippon Wellness Co., a mineral-water producer based in Kochi, western Japan, went bankrupt on Nov. 6 because price declines for the company’s products eroded sales, said Nobuo Tomoda, a senior manager of information at Tokyo Shoko Research Ltd., a bankruptcy research firm.

“The gap between large and small companies will probably widen,” Tomoda said. “Large companies can set prices independently, so they can protect profits. Smaller companies have little control.”

Cost Squeeze

The Tankan showed businesses expect costs of materials will rise, adding pressure on profits at a time when they are making discounts to attract customers at home.

The Bank of Japan defines large enterprises as those with capital of at least 1 billion yen. Small businesses have capital of between 20 million yen and 100 million yen.

Sentiment at larger firms improved enough for central bank Governor Masaaki Shirakawa and his colleagues to forgo any action at their final policy meeting of the year on Dec. 17-18, said Iwashita at Nikko Cordial. The board eased policy two weeks ago when it decided to provide 10 trillion yen of loans to banks.

Its benchmark interest rate is likely to stay at 0.1 percent for all of next year, according to 15 of 17 economists surveyed by Bloomberg News last month.

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