Recovery in Japanese business sentiment stalls, tankan survey shows

Weakening demand at home and abroad weighed on Japanese manufacturers' confidence in the first quarter, prompting them to cut spending plans, clouding the outlook for Prime Minister Shinzo Abe's economic reflation.

But the latest central bank survey showed service-sector firms saw business conditions improve to a nearly one-year high as they enjoyed lower oil costs and a surge in inbound tourism, underscoring the patchy nature of recovery.

Both manufacturers and non-manufacturers expect conditions to worsen slightly in the coming three months, the closely-watched tankan survey showed yesterday. That is a worrying sign for the Bank of Japan as it prints money aggressively in the hope of nudging companies and households to boost spending.

"We can see that companies are more worried about overseas demand. At the same time, the measure of domestic demand has not improved," said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities. "The capital expenditure forecasts also raise doubts about the likelihood of achieving the Bank of Japan's inflation target."

The headline index gauging big manufacturers' sentiment was flat from three months ago at plus 12 in March, the survey showed, surprising markets that expected a two-point rise.

Big non-manufacturers' sentiment improved by two points to plus 19, beating a median forecast of plus 17 and matching a high hit in June last year.

The survey will be among data that central bank policymakers scrutinise at its rate review next week for clues on whether their massive monetary stimulus is working its way through wider sectors of the economy.