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Japan business sentiment takes a hit, rebound seen

Business sentiment in Japan worsened in the three months to June but should recover in the months ahead, the Bank of Japan's tankan survey showed on Tuesday, in another sign the economy should weather a rise in the country's sales tax.

The headline index for big manufacturers' sentiment slipped by five points from three months ago to plus 12, compared with analyst expectations in a Reuters poll for a reading of plus 15.

Read MoreJapan industrial output rises 0.5% in May, below expectations

That reflects the drag on consumer spending and the economy from the April 1 increase in Japan's sales tax to 8 percent from 5 percent – the first rise in the consumption tax in 17 years.

However, big manufacturers said they expect business conditions to improve in the following quarter.

Pedestrians walk past a clothing store in Tokyo, Japan.
Tomohiro Ohsumi | Bloomberg | Getty Images
Pedestrians walk past a clothing store in Tokyo, Japan.

The closely-watched tankan report also showed big firms plan to raise their capital spending by 7.4 percent for the fiscal year that started in April, compared with analyst forecasts for a 6 percent increase.

"The capex [capital expenditure number] is a surprise for sure and this bodes well for the Nikkei," Ben Collett, head of Asian equities at Sunrise Brokers in Hong Kong, told CNBC Asia's "Squawk Box".

Read MoreJapan consumer prices rise at fastest pace since 1982

"If you spend more on capex, this will filter through to wages. We underestimated the negative impact of the sales tax hike but going forward, this appears to have largely been priced in," he added. The sentiment indexes in the tankan report are derived by subtracting the percentage of respondents who say conditions are poor from those who say conditions are good. A positive reading shows that optimists outnumber pessimists.

Japan's blue-chip Nikkei stock index opened 0.12 percent higher, while the yen was little changed around 101.35 per dollar.

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