TOKYO, Oct 1, 2008 (AFP) - Japanese business confidence turned negative for the first time in five years as executives fretted about escalating turmoil on global financial markets, a key central bank survey showed Wednesday.

The malaise in Japanese corporate boardrooms deepened for a fourth straight quarter amid growing fears of a recession in Asia's largest economy.

Confidence among big manufacturers tumbled to minus three in September from plus five the previous quarter, hitting the lowest level since June 2003, according to the Bank of Japan's Tankan survey of more than 10,000 firms.

The index measures the percentage of firms that think business conditions are good minus those that think they are bad.

The result missed market forecasts for a figure of minus one, prompting warnings that Japan's slump may be worse than previously thought.

'We see a risk that Japan's recession may be deeper than generally assumed,' warned Morgan Stanley economist Takehiro Sato.

'It may take till the start of 2009 at the earliest for the healing process in overseas economies and markets to begin.'

Fears of a recession in Japan have grown since the economy contracted in the second quarter of the year, with the global financial crisis dimming prospects for Japanese exports, particularly to the United States and Europe.

Corporate Japan 'is obviously going to be heading into a fairly difficult phase,' said Richard Jerram, chief economist for Japan at Macquarie Securities.

One glimmer of good news was the recent drop in oil prices.

'Clearly there's bad news in terms of cyclical demand to come over the next six months but I think it's important to remember it will be offset to some degree by the lower costs,' Jerram said.

Big manufacturers predicted a further deterioration in the sentiment index to a figure of minus five in December.

Confidence is down sharply from a two-year high of 25 seen in December 2006 but it is still much higher than a low of minus 38 struck six years ago, with companies in better financial shape than during past downturns.

Sentiment among big non-manufacturers slipped to one in September from 10 in June, with confidence among small and mid-sized firms also worsening.

'Japanese companies will continue to be pressured, probably at least until towards the middle of 2009,' said Kyohei Morita, chief economist for Japan at Barclays Capital.

'As long as the overseas economies, mainly the US and Europe, stay in the doldrums, the Japanese economy will not be able to get out of its stagnation.'

Chief Cabinet Secretary Takeo Kawamura said the negative sentiment reflected the weakness of the Japanese economy.

'It is all the more important to implement the supplementary budget given the situation,' he said, referring to the government's emergency spending package aimed at boosting the economy.

The gloomy survey reinforced market expectations that the BoJ will leave its super-low interest rates on hold at 0.5 percent for the foreseeable future despite the fastest inflation in a decade in Japan.

Japan's corporate sector had been a key driver of a recovery in the world's second-largest economy after years in the deflationary doldrums.

But firms are growing more cautious about ramping up spending on new plants and equipment due to soaring raw material costs and a weaker global economy.

The combined pretax profit before extraordinary items of all the companies is expected to drop by 8.1 percent in the current fiscal year to March, the survey showed. Big manufacturers alone anticipate a decline of 10.4 percent.

Firms of all industries and sizes plan on average to reduce their capital spending by 1.3 percent this fiscal year.

Despite the drop in business confidence, Japanese stocks closed up 0.96 percent on hopes of a new US financial rescue package.