By Leika Kihara
TOKYO (Reuters) - Japanese business sentiment has suffered its sharpest crash in three decades, a Bank of Japan survey showed on Monday, and the central bank said no early turnaround was expected with the economy set to shrink next year.
But markets rallied despite the gloomy news from Asia's biggest economy, buoyed by expectations that the White House would step in to prevent the collapse of the "Big Three" U.S. automakers after the Senate's rejection of a bailout.
President George W. Bush told reporters aboard Air Force One on a flight from Iraq to Afghanistan that while some funds earmarked to shore up the U.S. financial industry could be diverted to save the automakers, no announcement was imminent.
"We're not quite ready to announce that yet," he said, adding that a decision would not take long.
Last week's collapse of bailout talks in the Senate sent world markets reeling as investors feared another ugly turn in a global crisis that began last year with the collapse of U.S. subprime mortgages and which has now sent major economies, including Japan, into recession.
The Bank of Japan's tankan survey gauging big manufacturers' sentiment fell to minus 24, slightly worse than expected, from minus 3 the previous quarter. It was the biggest fall since the oil crises of the 1970s and the bleakest outlook since 2002, when Japan was recovering from a slump sparked by a banking crisis.
The survey pointed to more economic gloom ahead.
"The extent of the worsening outlook for March is a bit shocking," said Susumu Kato, chief economist at Calyon Capital Markets Japan. "The figures were within expectations but the outlook for March is seen worsening further. Thus, it's hard to predict the bottom of the current economic cycle."
Bank of Japan Governor Masaaki Shirakawa told the Financial Times the Japanese economy may contract in the year to March 2010. The central bank had previously forecast a modest recovery with 0.6 percent growth in the next fiscal year.
"Until recently, the Japanese economy was relatively immune from turbulence in credit markets overseas. But the picture changed after the collapse of Lehman Brothers," Shirakawa said.
In a historic meeting on Saturday, Japan, China and South Korea pledged joint action to tackle the impact of the global crisis, despite decades of animosity.
But while they promised not to create new trade barriers over the next year and backed efforts to bolster a regional safety net of currency swaps, they did not unveil any new initiatives.
CHINESE OUTPUT GROWTH FALTERS
China and India, Asia's key emerging economies, expect robust growth despite the global slowdown. But they are still suffering.
China's annual industrial output growth slowed to 5.4 percent in November, the weakest in at least nine years for a non-holiday month and down from 8.2 in October, the National Bureau of Statistics said on Monday. The median forecast of 26 economists polled by Reuters was for growth of 7.1 percent.
President Hu Jintao said the employment situation would be "very serious" in 2009.
"Next year's employment market will be very serious, affected by the international financial crisis," Xinhua quoted Hu as saying. Analysts say unemployment could fuel more social unrest.
Data on Friday showed Indian factory output fell in October for the first time in 13 years.
"It is a shocking figure," said T.K. Bhaumik, economist at JK Industries Group. "This is a wake up call for the government."
But regional markets took heart from hopes that Bush would rescue U.S. auto firms and prevent another major corporate collapse that could have reverberations around the globe.
At 11:45 p.m. EST Japan's benchmark Nikkei 225 was up 5.3 percent, the Hang Seng had gained 2.8 percent, and Seoul's bourse was 4.4 percent stronger. Automaker stocks gained across the region.
Australia's S&P/ASX 200 index rose 3 percent.
The yen was trading around 91 per dollar after shooting higher on Friday to nearly 88 per dollar, a 13-year high, when investors bought it as a safe haven following the collapse of the auto talks in the Senate.
(Additional reporting by Matt Spetalnick on Air Force One, and Eadie Chen and Emma Graham-Harrison in Beijing; Writing by Andrew Marshall; Editing by Neil Fullick)
