Japanese firms' sentiment on business conditions hit a four-year low in April-June as commodity-driven inflation and a dim global growth outlook took their toll, adding to expectations that the central bank will sit tight on interest rates this year.
The corporate sector has been a key driver of the world's No.2 economy but is showing some signs of losing steam this year amid growing economic uncertainty and rising costs that squeeze firms' profits and curb their appetite for capital spending.
The government's business survey index (BSI) of sentiment at large manufacturers fell to minus 15.1 in April-June from minus 12.9 the previous quarter, while that at large service-sector firms fell to minus 15.3 from minus 7.2.
Both readings were the lowest since the government survey began in April-June 2004.
"The data confirms that higher oil and resource prices have been a blow to corporate sentiment," said Takeshi Minami, chief economist at Norinchukin Research Institute.
The survey also underlined analysts' views that the Bank of Japan's closely watched tankan survey due on July 1 will show a further slide in the business mood.
Japanese government bond futures rose 0.38 point to 133.88 immediately after the data, while the Nikkei share average tumbled more than 1 percent.
"Higher raw material prices are dampening the (corporate and consumer) mood, and downside risks to the economy warrant careful attention. So I think the BOJ's current policy stance is
appropriate," Minami said.
Big firms' overall sentiment was down to minus 15.2 against minus 9.3 in January-March, according to the survey.
The survey of 11,746 firms followed a Reuters Tankan survey last week that showed Japanese manufacturers' sentiment stayed at a five-year low as firms felt the pinch from high raw material costs and a global economic slowdown.
A separate Reuters poll showed economists saw the BOJ tankan's headline sentiment index for big manufacturers sliding to plus 3 from plus 11 in March, which would be the lowest
reading since September 2003.
That poll also showed that big firms' capital spending is seen rising 2 percent in the fiscal year to next March, compared with a 7.7 percent increase seen last June for fiscal 2007/08.
Still, some economists pointed to the unexpected firmness in readings in the businesses' outlook for the upcoming quarters in the government's latest survey.
"Sales are still growing, and this is the key. Shrinking sales would cause fears that other areas would also deteriorate like a downward spiral, but they are not expecting that," said
Seiji Adachi, senior economist at Deutsche Securities.
"Business in Asia is still firm. It's not good in the United States but it is seen bottoming out. The yen is weak. All in all, the outlook is not worsening."
In the latest government survey, big firms' index forecast for July-September shows a rise to plus 3.7 and a further improvement to plus 5.7 in the last quarter this year.
The government's BSI measures the percentage of firms that expect the business environment to improve from the previous quarter minus the percentage that expect it to worsen.
The survey also showed firms expect their capital spending to fall 0.9 percent in the year to next March, against a fall of 9.4 percent seen in the previous survey.
Japan's economy grew a real 1 percent in January-March, or 4 percent annualised -- far more than its potential growth rate, which is seen around 1.5 percent -- thanks to robust exports,
despite sluggish capital spending.
But economists expect it to contract slightly in the current quarter as support from exports would probably weaken and spikes in oil prices cut into companies' earnings.
The Japanese central bank has left monetary policy steady since February 2007 when it lifted rates by a quarter point to 0.5 percent. But the fallout from U.S. subprime crisis has forced
the BOJ to drop its tightening bias and adopt a neutral stance.