The outlook for the Japanese economy has worsened, when the latest Tankan survey showed that business confidence had fallen to the lowest point for four years, and official data said that industrial output was declining quickly. The Bank of Japan's quarterly Tankan business diffusion index for large manufacturers fell to minus 38, the central bank said.

The quarterly index, which measures the difference between firms which say the economy is improving and those which say it is worsening, stood at minus 31 for the three months to March.

Yesterday's figure was the worst since August 1994 but was slightly better than many economists had predicted. The index would pick up over the next three months to minus 34, the central bank forecast.

The Tankan is a detailed survey of businesses and their plans for the months ahead and, as the central bank's best source of information for planning, is regarded as the touchstone of future economic health.

"The figures are better than I expected. But I think some firms are being a little bit optimistic," said Susumu Kato, economist at Barclays Capital.

The yen jumped after the report came out as dealers unloaded heavy dollar positions they had built up fearing a much worse result.

Shortly before the Tankan came out the trade ministry gave its latest, grim industrial output figures. Output in May fell by 2.0 per cent from the figure for the previous month. This was the fourth monthly fall and was much worse than expected.

"I think there is still an ongoing deterioration in business conditions due to the Japanese government's fiscal policy," Kato said.

The government pushed up a consumption tax from three to 5 per cent in April last year, crushing consumer spending. The latest retail sales figures, also released yesterday showed there was still little recovery.