"There is a wealth of additional detail in the Tankan which will be at least as informative as the general questions about business conditions, including responses on profitability, capital expenditure, capacity utilisation, employment levels, input and output prices, and financial conditions," explained Julian Jessop, chief international economist at Capital Economics.

"These should show that financial conditions remain extremely accommodative in Japan despite the credit crunch in the West, and that labour shortages are still a bigger concern," he added. "With the price components likely to be firm too, the Tankan should raise expectations that the Bank of Japan will be able to hike rates again soon."

According to a report from Fortis Bank, the survey is likely to have "suffered from the ongoing rise in commodity prices, which are eating into consumers' purchasing power (this should show up by a fall in the domestic demand and supply conditions)."

Meanwhile, the report noted that higher prices are also eroding companies' margins, which should be reflected by a strong rise in the input price index. "Foreign demand is expected to have remained weak against a backdrop of slowing world trade growth and the appreciation of the yen (this, in turn, should be reflected by a reduction in the overseas supply and demand conditions)," the report said.

The consensus forecast is looking for the large manufactures' index to decline to a reading of +3 compared to the first quarter's +11 reading while the outlook index for large manufacturing is projected to fall to a score of +2 from +7.

"We expect the diffusion index of current business conditions to fall to +2 for large manufacturers (March: +11) and to stay at +12 for large non-manufacturers," economists from Barclays Capital Economics wrote in a note to clients. "One big question is whether the DI will turn negative for large manufacturers. In the past, a shift from positive to negative territory has, without exception, marked a move into recession."

Meanwhile, the consensus is also looking for a deterioration in the non-manufacturing index, which is projected to decline to a reading of +8 compared to +12 in Q1. The outlook for the non-manufacturing index is also projected to score a reading of 7 following the previous quarter's +13.

Masamichi Adachi at JPMorgan argued that commodity prices will weigh heavily on non-manufacturers.

"Higher energy and material prices, even in yen terms, along with a decline in export prices due to yen appreciation, have squeezed national income. Part of this burden has been transferred directly to consumers, for example through higher gasoline prices," Adachi said.

"However, most of it is being borne by a wide range of business sectors, including small firms that provide services to large exporters, who have become less confident about external demand," he added. "The degree of decline in the business conditions DIs is thus likely to be significant across all types of firms-grouped by both sector and size."

The large all-industry capital expenditures index, meanwhile, is expected to rise by 2.0% compared to a 1.6% gain previously, although some argue that the indicator will not bear much importance this time around.

"Capex plans in the June Tankan are unlikely to press for a major alteration in the BoJ's already cautious economic assessment," economists from Citigroup's FX desk noted. "The key technical support on USDJPY is at 105.0 which is the 55 dma. A breach of that would open up the w ay towards 103."

"Apart from business confidence and scheduled investment, which are the headlines of the report, the Tankan report contains a wealth of other information," economists from Fortis Bank said. "One of the highlights is the employment conditions index, which measures companies that say employment is excessive minus those that say it is insufficient. We expect this index to have risen to -8 from -9, in line with the recent softening of the labour market."

Nevertheless, Jessop said he remains upbeat about the economic outlook for Japan. "Even if some of the gloomier forecasts are proved right, they should still leave the main indices at much higher levels than during previous downturns," he said. "A Tankan reading as low as zero would still be consistent with GDP growth of 1% or more. The headline index would have to be firmly negative (-15 or worse) to be signalling a recession."

By Erik Kevin Franco, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Stephen Huebl, This email address is being protected from spam bots, you need Javascript enabled to view it

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