The relentless advance of crude oil, iron ore and other commodity prices has dashed sentiment among Japan’s largest manufacturers and is poised to bring their seven year run of profit growth to a screeching halt.

The blue chip giants of Japan Inc are predicting a 9.9 per cent slump in pretax profits in the current financial year: a forecast which suggests that the benefits of exposure to China, India and other fast-growing Asian economies are now waning.

Today’s release of the Bank of Japan’s quarterly Tankan survey – the minutely scrutinised report on business sentiment – coincided with another downbeat snapshot from the world’s second biggest economy: the Japanese have become the first major developed nation now buying fewer cars than it did a year ago.

Oil above $140 per barrel, an ageing population and a younger generation that feels less and less “inspired” by cars mean that the trend is likely to continue.

For an industrial powerhouse that has grown rich by selling automobiles, the revelations from Japan’s auto sector may deal a series of knock-on blows throughout the economy: the business models of the construction, retail and restaurant industries all depend heavily on Japan being a nation of drivers.

The Tankan, which tracks the percentage of positive outlooks minus negative outlooks throughout corporate Japan saw 10 out of 15 industries now more pessimistic about the future than they were at the end of March. Confidence in the auto, shipbuilding and oil products industries was especially dented, as companies wrestle with the challenge of passing on commodity prices rises to consumers without destroying consumer activity.

But overall, the Tankan report was considerably less gloomy than the market feared. Investors, however, told The Times they were still in no mood to take chances. This was, after all, the third straight quarter in which the main Tankan index had fallen and analysts said that the risks remain “probably on the downside”. Tokyo stocks sank slightly, completing the worst run of consecutive falls in four years.

But some analysts said that the Tankan report contained very little to trigger an immediate sell-off. “The Tankan underscores the fact that fundamentally, the Japanese economy is not too bad”, said Hiroshi Shiraishi of Lehman Brothers, “the Tankan says that the corporate sector is holding up and not collapsing, even if the risk continues to look skewed to the downside.”

As markets around the world have endured the spasms of the sub-prime mortgage collapse, the credit crunch and rocketing commodity prices, Japan has emerged as something of a safe haven. Its stocks have held far more firmly than those in Shanghai, and the balance sheets of its banks are in far better shape than their US or British counterparts.

Critically, said Macquarie’s chief Japan economist, Richard Jerram, there was little in the Tankan report to suggest that Japan’s largest manufacturers were “taking knives to their capital spending plans.”

Mr Jerram believes that, after many years of deflation in Japan, the effect of a bout of sharper inflation could have dramatic effects. Suddenly, ordinary Japanese, whose combined savings and assets are worth 1.5 times the country’s GDP, are making negative real returns on their bank deposits. The search for stronger yields and better returns, he said, could eventually drive huge flows of individuals’ capital towards domestic bonds and equities.

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