Yen gives up gains despite strong tankan

TOKYO, Oct 2 (Reuters) The yen gave up brief gains against the dollar and the euro on Monday after a surprisingly strong tankan survey of business sentiment did little to change the outlook for the Bank of Japan to raise interest rates only gradually.

The tankan's headline diffusion index of confidence at big manufacturers rose to a two-year high of plus 24 in September, contrary to expectations for an unchanged reading from the plus 21 in June.

But confidence was seen falling to plus 21 in December and big firms' plans for capital spending were slightly below forecasts, possibly keeping the BOJ cautious on rates.

''The improvement is not that broad based, just for large manufacturers,'' said Masafumi Yamamoto, currency strategist at Nikko Citigroup. ''At least until the end of the year we will have accommodative conditions in Japan and no rate hike by the BOJ. That should be the reason for the continued weakness of the yen.'' The yen has tumbled this year to all-time lows against the euro and an eight-year trough versus the British pound as investors have dumped the low-yielding Japanese currency in favour of higher-yielding counterparts.

Overnight rates in Japan are just 0.25 percent. The Federal Reserve is holding rates at 5.25 percent, while the European Central Bank is widely seen lifting rates to 3.25 percent at a meeting this week.

The dollar was little changed on the day at 118.20 yen, reversing an early dip to 117.87 yen.

The euro was also nearly flat at 149.80 yen, within sight of its lifetime high at 150.73, after initially falling to around 149.50 yen.

In the quarterly tankan, big firms said they planned to boost capital spending by 11.5 percent in the current business year, below expectations for a 11.7 percent increase.

But in one bright spot of the report, major non-manufacturers felt the biggest need to hire workers in 14 years.

The dollar was helped in part after upbeat economic data on Friday, including a report showing a pick-up in Midwest business activity, helped to soothe worries about a sharp slowdown in U.S.

growth.

For more clues on the U.S. outlook, investors were awaiting the Institute for Supply Management's factory survey for September due later in the session.

The ISM index is seen slipping to 53.5 from 54.5 the previous month, which would still indicate a moderate expansion of activity.

''Views about the U.S. economy changed a bit last week, so that's an upward bias to the currency,'' said a trader at a Japanese bank.

Reuters SBA DB0754