Big Japanese manufacturers' sentiment improved for the first time in six quarters in the three months December to hit a one-year high, a closely watched central bank survey showed, as stock gains and yen falls brightened prospects for the export-reliant economy.
The upbeat outcome reinforces market expectations that the Bank of Japan will hold off on expanding stimulus measures in the coming months.
Service-sector confidence was unchanged from three months ago, the BOJ's "tankan" quarterly survey showed on Wednesday, underscoring the fragile and patchy nature of recovery in the world's third largest economy.
The headline index measuring big manufacturers' business sentiment rose to plus 10 from plus 6 three months ago, the tankan survey showed, matching a median market forecast and hitting the highest level since December 2015.
"Manufacturing sentiment is doing well, reflecting a recovery in global trade," said Hidenobu Tokuda, senior economist a Mizuho Research Institute.
"Capex plans seem a little more cautious than I expected, so this is an area of concern. I think the economy will continue to grow due to exports and public works spending. The chance of additional monetary easing has receded."
Big non-manufacturers' mood was flat from three months ago at plus 18, compared with a median market forecast of plus 19.
Big manufacturers and non-manufacturers expect business conditions to worsen slightly in the coming three months, the survey showed, suggesting that companies remain cautious on whether the positive market trend will continue.
Big firms plan to increase capital expenditure by 5.5 percent for the current fiscal year to March 2017, the survey showed, down from their previous plans to raise spending by 6.3 percent. Analysts polled by Reuters expected capital spending plans to be raised by 6.1 percent.
Despite more than three years of aggressive money printing by the BOJ, Japan's economy has failed to emerge sustainably from the doldrums as soft global demand and slow wage growth weigh on exports and private consumption.
But recent data offered signs of hope. Private consumption edged up and Japanese firms' order books rose in November on robust Asian demand, masking concerns about the protectionist leanings of U.S. President-elect Donald Trump.
The stock market rally and recent yen declines, triggered by hopes for Trump's policies, also likely helped boost business and household confidence, analysts say.
The BOJ is likely to keep monetary policy steady and give a more upbeat view of the economy at next week's rate review, sources have told Reuters.