Big Japanese manufacturers expect conditions to worsen significantly in the next three months, responses to a Bank of Japan survey collected after the March 11 earthquake showed on Monday. It was a reversal of the full survey results.

The BOJ separated figures in its tankan survey of corporate sentiment for March into responses obtained before and after the earthquake to obtain a clearer picture of how firms perceived the effects of the devastation.

For a graphic: http://graphics.thomsonreuters.com/11/03/JP_BOJTKN0311_CT.gif

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KEY POINTS:

-- The post-quake index for big manufacturers' sentiment was plus 6 , the same as the full survey's plus 6 reading and plus 5 in December, the data showed.

-- The big manufacturers' index for June 2011 was seen at minus 2, showing that firms expect conditions to worsen. The reading for the full survey was plus 2.

COMMENTARY:

JUNKO NISHIOKA, CHIEF ECONOMIST, RBS SECURITIES, TOKYO

The survey results were better than expected despite the fact the BOJ collected replies up until the end of March. This may be due to drops in the number of responses from companies in quake-hit areas.

Still, the degree of deterioration that companies anticipate in the coming three months was substantial and this could prompt the BOJ to tone up its resolve to supply ample liquidity to markets at this week's policy meeting.

NAOMI FINK, JAPAN STRATEGIST, JEFFERIES & CO., HONG KONG

The outlook has really deteriorated. That is what you would have expected. It went from favorable to not favorable. But this is not a complete picture pre- and post-quake. Manufacturers and non-manufacturers were acknowledging things good before the quake, but they plunged into uncertainty one quarter ahead.

YASUO YAMAMOTO, SENIOR ECONOMIST, MIZUHO RESEARCH INSTITUTE

Many companies have still been unable to fully grasp the fallout from the earthquake and subsequent nuclear crisis. But they may be thinking the damage will not turn out to be as big as that seen in the wake of the collapse of the Lehman Brothers.

The last financial crisis caused a plunge in global demand, but this time companies are facing restriction in output. This may make them feel less worried about potential impacts on their earnings once production gets back on line.

The yen's rise proved short-lived after the earthquake thanks to joint G7 intervention, which has also supported corporate sentiment.

The BOJ is likely to stand pat on monetary policy at its rate review this week as it needs more time to determine future developments. But it will cut its view on the economic outlook, citing a heightening of downside risks, and signal its readiness to ease further depending on the yen, long-term rates and the real economy.

KOICHI OGAWA, CHIEF PORTFOLIO MANAGER, DAIWA SB INVESTMENTS

The positive figure for March strikes me as a bit odd and it's a bit difficult to believe. I wonder if the impact of the disaster is really reflected in the result, given that you've still got the rolling power blackouts and Fukushima, among other things.

The minus figure for June is not a surprise given that it factors in various impacts from the quake. We could see positive figures for September and the year-end when you factor in the boost from relief spending and a recovery in production, but I don't expect the situation to have normalized come June.

YOSHIKIYO SHIMAMINE, CHIEF ECONOMIST AT DAI-ICHI LIFE RESEARCH INSTITUTE

The fall in the outlook is not as big as I feared, but I cannot be optimistic either because it remains unclear how the situation with the nuclear accident and the electric power supply will develop over the next three months.

The Japanese economy showed a recovery trend in the January-March period before the earthquake. Whether it could get back on that trend depends on stabilizing the nuclear plant and the power supply.

MASAMICHI ADACHI, SENIOR ECONOMIST, JPMORGAN SECURITIES JAPAN

It's a big surprise -- that number is too good. After the quake the number is still 6 for the headline number, and if you look at the non-manufacturing sector after the quake is better than before the quake, which is impossible.

I think there must be some technical issue with formulating the number from receiving the surveys. I think many firms will have filled out the surveys before the quake and sent them after the quake, so this reading may be misleading to gauge the impact of the quake.

Of course, after the quake the outlook is definitely looking worse but the impact is only an 8 point decline. That is not a huge decline that maybe we could expect in coming months. Many firms may not have realized the impact immediately after the quake.

I think the BoJ also realises this may be a little misleading to gauge the impact. They will still be cautious on the outlook and our view is the BoJ needs to ease further in this week's policy meeting. However, the market consensus is for staying on hold.

BACKGROUND:

-- The sentiment indexes are derived by subtracting the percentage of respondents who say conditions are poor from those who say they are good. A negative reading means pessimists outnumber optimists.

-- The Bank of Japan will hold its two-day policy meeting this week and the central bank has expressed its readiness to loosen monetary policy further as early as this month if there is evidence that the quake's damage could threat Japan's return to a moderate economic recovery.

-- The government, which estimates material damage from the quake at about 16 trillion yen to 25 trillion yen ($190-300 billion), aims to compile several emergency budgets to cope with the disaster, with the first likely due by the end of this month, while it juggles how to fund disaster relief. ($1 = 84.060 Japanese Yen)

(Reporting by Taiga Uranaka, Rie Ishiguro and Tetsushi Kajimoto in TOKYO, Richard Leong in HONG KONG, and Mantik Kusjanto in Wellington; Editing by Edmund Klamann and Nathan Layne)

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