(For more stories on the Japanese economy, click) * Confidence at manufacturers edges up from record low levels
* Service-sector firms' sentiment hits all-time low
* Corp sentiment seen up by Aug, doubt remains over recovery
By Izumi Nakagawa
TOKYO, May 18 (Reuters) - Confidence at Japan's manufacturers edged up from record low levels, a Reuters monthly poll showed, as rebounds in exports and production suggest the world's No.2 economy may have reached a trough in the first quarter.
Both manufacturers and service-sector firms expect the situation to improve over the next three months, but they see the recovery largely as a reaction to a sharp plunge in global demand and hefty inventory cutbacks since late last year.
With companies slashing jobs and curtailing investment, any economic recovery is expected to be fragile, a view that was underscored by a drop in the non-manufacturers index to a record low.
The Reuters Tankan survey, a leading indicator for the Bank of Japan's closely watched tankan quarterly corporate survey, found manufacturers' sentiment improved 7 points to minus 69 in May. It is seen climbing a further 18 points to minus 51 in August.
"This mostly reflects progress in inventory adjustments, not a return of final demand," said Azusa Kato, economist at BNP Paribas.
"Take capital spending for example. The capacity utilisation rate for manufacturers may have rebounded from 50 percent to 60 percent now. But that won't prompt companies to increase capital spending," she said.
The Reuters Tankan and BOJ tankan show a correlation of 95 percent for their headline sentiment indexes for manufacturers since the Reuters survey started in 1998.
"Orders have been recovering since March as a rebound to a rapid inventory adjustment," an official at an electric machinery firm said in the survey of 211 major firms taken April 23-May 13.
But the plunge in orders was so big that that the situation is still worse than before the global financial crisis, the official added.
Sentiment among non-manufacturers worsened 6 points to minus 44 but is seen up 9 points to minus 35 in August.
The central bank's March tankan, released on April 1, showed Japanese business confidence crumpled at its fastest pace on record to an all-time low but saw a slight improvement by July.
In the Reuters Tankan, sentiment in the electric machinery and autos/transport equipment sectors, major industries in Japan, remained mired near record low levels.
"It is still unclear how the economy may recover," one transport equipment firm said in the survey.
"As the situation is severe with the exchange rate, earnings remain bad at an export-reliant firm like ours."
The dollar has fallen to a two-month low against the yen to around 95 yen, amid renewed concerns about the depth of the global recession.
That was below the exchange rate of 97.18 yen expected on average by big manufacturers in the BOJ's March tankan.
Among non-manufacturers, all but wholesalers and those in the category of other services grew less confident about the underlying situation.
"Customers remain on guard against a deterioration in living standards, holding off from buying things and opting to buy low-priced items," said a retailer in the Reuters Tankan survey.
Preliminary gross domestic product (GDP) figures are due at 8:50 a.m. on Wednesday (2350 GMT Tuesday).
Economists polled by Reuters have forecast a 4.2 percent contraction in the first quarter, after a 3.2 percent contraction in October-December.
In the Reuters Tankan the percentage of respondents who say conditions are poor is subtracted from those who say they are good. A negative figure means most of those surveyed are pessimistic. (Writing by Tetsushi Kajimoto; additional reporting by Hideyuki Sano; Editing by Edwina Gibbs)