The Bank of Japan's quarterly survey of business sentiment indicates confidence in the economy is weaker than expected and hints conditions may get worse.The "tankan," released Oct. 1, says that confidence since the previous survey in June is lower even among major manufacturers, who have led the economy amid the lingering aftereffects of the consumption tax increase in April. The survey shows manufacturers, both major and smaller ones, predict conditions to worsen later in the year.The dismal figures further reduced expectations for a change in the BOJ's easy monetary policy. The official discount rate has been kept at an all-time low of 0.5 percent since September 1995.The diffusion index for major manufacturers fell to 3 from 7 in June, even though the BOJ predicted in the June report that the index would rise to 8. The diffusion index is calculated by subtracting the percentage of companies that believe current business conditions are unfavorable from that of firms with a positive outlook.The September survey covered 9,391 firms, including 708 companies defined as major firms by the BOJ and 5,420 small companies. The rest are large and medium-size firms whose data are not reflected in the business confidence index.The index for car manufacturers declined 7 points to 11 and that for iron and steel makers dropped 16 points to negative 24. Producers of processed metals and ceramics each posted a roughly 20-point plunge in the index.For large nonmanufacturers, the confidence index posted a negative 15, down 8 points from the previous survey. The indexes for the retail and construction sectors were especially dismal; retail was down 19 points and and construction 10 points.Among smaller firms, the diffusion index dropped 6 points for manufacturers to negative 13, and 7 points for nonmanufacturers to negative 18. "The consumption tax increase, as well as decreases in public works spending and housing investment, have affected major industries broadly," said Masayuki Matsushima, head of the BOJ's research and statistics bureau.The situation is worse for smaller industries, he added.The diffusion indexes for all four survey categories -- large and small manufacturers and nonmanufacturers -- worsened simultaneously for the first time since the August 1995 tankan, when the economy was hit by a sharp appreciation of the yen against major foreign currencies.Firms seem to be aware that repercussions from the purchase rush before the tax increase will gradually fade away, Matsushima said. Exports are also remaining on an upward course, helping firms to earn profits.The year-on-year growth forecast in sales generated by exports for major manufacturers in fiscal 1997 was revised upward by 1.2 percent from the previous survey. "There is no need to change our judgment that the path of moderate economic recovery has not been undermined," Matsushima said.