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Japan Corporate Sentiment Improves: BOJ Tankan

Shibuya district, Tokyo
Getty Images
Shibuya district, Tokyo

Sentiment among Japanese manufacturers improved for the first time in three quarters, according to the Bank of Japan's key economic indicator, the Tankan survey.

The headline index for big manufacturers' sentiment came at in minus 8, compared to the minus 12 reading in the previous quarter. However, the data was a smaller improvement than the minus 7 percent reading that Reuters had forecast.

A negative reading of the Tankan suggests there are more pessimists than optimists among the manufacturers surveyed.

Large firms stated they remain cautious about increasing capital spending until they see solid signs of improved demand, which suggests they remain unconvinced of "Abenomics."

Analysts told CNBC that despite the weaker-than-expected data, there's reason to be optimistic.

(Read More: How Distant Is Japan's 2% Inflation Target?)

"Back in December, the same people who wrote the survey said they expected the number to be minus 15. So, there has been a big change in expectations. It's still an improvement so we shouldn't be pessimistic about it," said Takuji Okubo, principal and chief Economist at Japan Macro Advisors on "Asia Squawk Box."

The dismal business outlook puts the spotlight on Tuesday's highly-anticipated Bank of Japan policy review. Central bank chief Haruhiko Kuroda is expected to come out with guns blazing as investors await drastic stimulus measures such as longer-term government bond purchases.

Japan's long-standing struggle with deflation, i.e. declining prices have led companies to invest abroad as a strong yen weighs on their production costs. Many economists are hoping that Prime Minister Shinzo Abe's pledge of aggressive monetary easing measures, known as "Abenomics," will weaken the yen and consequentially, induce more domestic investment.

(Read More: Ssshh! Why Japan Is Keeping Quiet on the Yen)

"For a long time, Japanese manufacturers have been very cautious. They have very pessimistic growth expectations so they've been increasingly investing outside of Japan," said Thomas Byrne of Moody's Sovereign Risk Group.

If the government does satisfy markets this week, the yen may extend declines. The currency has already lost roughly 8 percent against the dollar since the start of 2013 and further depreciation will boost profitability of the manufacturing sector, and in turn, lift corporate sentiment.

"After 25 years of deflation, you have to be irresponsible if you're going to target 2 percent inflation. You have to over promise and that's what Abe's doing," said Mark Matthews of Bank Julius Baer on "The Call."