<div><p>TOKYO (Reuters) - Confidence among Japanese manufacturers has recovered to its highest level since the financial crisis hit, as strong exports to resurgent Asian markets raise hopes of a steady global recovery, a Reuters poll showed.</p><p>The Bank of Japan, which wraps up a two-day rate-setting meeting on Tuesday, will likely decide to continue monitoring economic improvements and hold off on new policy initiatives while keeping interest rates near zero to help get the country out of deflation.</p><p>"Asian economies have proved to be stronger than previously thought with no signs of a slowdown yet to emerge. That supports projections that the global economy will continue to recover," said Masamichi Adachi, a senior economist at JPMorgan Securities Japan.</p><p>"This gives a good reason for the Bank of Japan to hold off on new policy initiatives. But the BOJ is in no position to scurry to unwind its unconventional easing policies because deflation is deeply entrenched in Japan and worries about the yen's rise persist," he said.</p><p>Responding to separate questions about growth and prices, half of Japanese firms said they expect domestic goods and services prices to fall for the next six months, as weak demand pushes the economy further into deflation.</p><p>Japan's exporters, a key driver of the economy, have benefited from a brisk pickup in demand from China and other fast-growing Asian economies.</p><p>But not all manufacturers were upbeat in the Reuters tankan poll, designed to be a leading indicator of the BOJ's influential quarterly tankan survey. Some leading exporters, such as automakers, grew more pessimistic due to the strong yen, which eats into the value of overseas earnings.</p><p>"The Japanese economy is on a recovery trend but there are worries about the impact from deflation and the yen's rise," said one respondent, an executive at a transport equipment maker.</p><p>Sentiment in the service sector improved for the first time in three months, although service companies are still much more pessimistic than manufacturers due to deflation and weak consumption at home.</p><p>The Reuters tankan survey of 400 big firms, of which 231 responded, showed that confidence at both manufacturers and non-manufacturers is expected to edge up over the next three months, but the pace of recovery is likely to be slow.</p><p>The poll has a 95 percent correlation based on data compiled since June 1998. The BOJ's tankan, which next comes out in April, may show continued improvement in big manufacturers' sentiment from the record low hit last year.</p><p>For graphic on the Reuters and BOJ surveys, click on:</p><p>http://link.reuters.com/cuw94h</p><p>Overall, the manufacturers' sentiment index in the Reuters Tankan rose 8 points to minus 19, the best level since minus 14 in September 2008. It is expected to rise a further 3 points to minus 16 by April.</p><p>"The pace of recovery will likely slow down considerably because corporate profits are squeezed by price falls in Japan. It is difficult to expect manufacturers to turn optimistic solely on overseas demand," said Yonosuke Iwata, an economist at Dai-ichi Life Research Institute.</p><p>Service-sector confidence remains deep in negative territory, though it rose 5 points to minus 34. It is seen rising 3 points to minus 31 by April.</p><p>"Faced with uncertainty ahead, consumers are increasingly cutting back or holding off spending and only selectively buying low-priced goods," said one respondent, an executive at a retailer.</p><p>Japan has barely emerged from its deepest recession in postwar history, and the government is worried that deflation and weak demand may push the economy back into recession, which could warrant more aggressive policy action by it and the BOJ.</p><p>The BOJ may say after its two-day policy review ending on Tuesday that there is less chance the country will slip back into recession. It is expected to hold off on new initiatives, having introduced a new funding operation last month.</p><p>The Reuters tankan indexes are calculated by subtracting the percentage of pessimistic respondents from optimistic ones. A negative figure means pessimists outnumber optimists.</p><p>In the separate questions on growth, 70 percent of firms said they expect gross domestic product to expand by between zero and 1 percent for the next five years because of a rapidly aging population.</p><p>(Editing by Hugh Lawson and Michael Watson)</p><img src="http://admatch-syndication.mochila.com/images/ad.gif?aid=67721053&bid=informcom" /></div><div id="copyright"><div>

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