Japanese Manufacturers' Sentiment Turns Positive

Yuriko Nakao | Bloomberg | Getty Images

Sentiment among Japanese manufacturers moved into positive territory for the first time in two years in the three months to June on Monday, according to the Bank of Japan's main economic indicator, the Tankan survey.

The headline index for big manufacturers' sentiment came in at 4, exceeding analyst forecasts of a 3 reading, according to a Reuters poll. Monday's result was a dramatic 12 point rise from the previous quarter's result which came in at -8.

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Market watchers were hotly anticipating the results of the Tankan as a gauge of the effectiveness of 'Abenomics,' Prime Minister Shinzo Abe's policies of aggressive monetary stimulus, fiscal spending and structural reform, designed to revive the economy from 15 years of deflation and help achieve a 2 percent inflation target.

Within the Tankan survey, large non-manufacturing firms saw the largest improvement in sentiment, surging to a 12 reading. However, large non-manufacturers' expectations remained flat for the next quarter at 12, while big manufactures' indicated a 4 reading for this quarter and a rise to 10 in the next quarter.

Also, surprising on the upside were expectations for capital spending by large firms of 5.5 percent for the fiscal year 2013/2014. A Reuters poll had forecast a 2.9 percent rise.

Analysts said the survey's surprise jump was a huge positive for Prime Minister Abe.

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"After two years I think this is something really to cheer about and be optimistic about," said Alvin Liew, senior economist at UOB bank.

"From where we are today the momentum is sustainable for the second half of this year," said Alistair Newton, senior political analyst at investment bank Nomura.

Investors appeared to be nonplussed, however, as the Nikkei 225 erased earlier gains which saw the benchmark index rising to a one-month high.

"Abenomics" has helped to power the country's main stock index by 55 percent since mid-November, although market confidence has waned in recent months after Abe disappointed investors with his "third arrow" of his policy, which critics said lacked the detail and implementation hoped for. Stocks have now come back roughly 14 percent from a five-and-a-half year high seen in late May.

Analysts say the strong tankan may not have much impact on stocks as the result was already priced in.

"Markets are forward-looking so I think most of the good news was priced in," Paul Gruenwald, Chief Economist, Asia Pacific at Standard and Poor's Ratings Services told CNBC.

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"The equity markets don't always line up with the real economy, but I think this is almost an unambiguously good number for Japan so we'll have to see if we can put a couple more of these on the board," he added.

Market watchers will now look ahead to the results of the country's Upper House elections scheduled for July 21. If Abe secures a majority, he should gain more firepower to push his policies through more quickly.

"Market expectations will be dependent after the election on what Abe lays out on structural reform and let's be honest so far we have not seen anything on what the shape of the third arrow is going to be," added Newton.