Confidence among major Japanese manufacturers worsened for the fourth straight quarter in December to 7 from 8 three months earlier, taking a hit from surging costs and aggressive monetary tightening overseas that has raised concerns about slowing global growth, Bank of Japan data showed Wednesday.

The mood among large nonmanufacturers, meanwhile, continued to improve, with its reading rising to 19 from 14, its highest since before the COVID-19 pandemic in December 2019, helped by the lifting of antivirus curbs and government support to spur the battered tourism industry.

The average market forecast was for the key index measuring sentiment among companies such as those in the auto and electronics sectors to fall to 6 in a Kyodo News survey. The figure for nonmanufacturers was projected to rise to 18.

File photo taken in March 2020 shows the Bank of Japan headquarters in Tokyo. (Kyodo)

Rising costs are threatening to squeeze corporate profits. The yen's weakness is also contributing to the inflationary pressures in resource-scarce Japan, which relies heavily on imports of energy, raw materials and other items.

"Concerns about global growth are increasing but the results were not that bad," said Yoshimasa Maruyama, chief economist at SMBC Nikko Securities Inc.

"Companies would have to continue passing on costs into next year but the yen's depreciation has been taking a respite and falling commodity prices will ease the inflationary pressure," Maruyama said.

The Tankan index represents the percentage of companies reporting favorable conditions minus the percentage reporting unfavorable ones.

The indexes measuring those who say pricing will rise minus those saying the opposite hit their highest levels for both manufacturers and nonmanufacturers. The survey, however, points to more room for price hikes as input costs have surged.

A weak yen is a double-edged sword. It inflates import prices but it also boosts the overseas profits of exporters, including automakers like Toyota Motor Corp., at a time when COVID-related supply chain disruptions have eased.

Still, rapid fluctuations in the currency market make it difficult to draw up business plans and Japanese authorities intervened in September and October to slow the yen's sharp fall.

Automakers remained deeply pessimistic, with the index at minus 14, despite the yen exchange windfall. Their sentiment is expected to improve going forward, albeit in negative territory, the survey showed.

The lifting of anti-virus curbs and the government's program to support the battered tourism sector helped improve sentiment in the hotel and restaurant industry, with the reading recovering sharply from minus 28 to zero, a pre-pandemic level.

In the months ahead, business sentiment among large manufacturers is forecast to fall slightly to 6 and the mood among major nonmanufacturers is tipped to worsen to 11.

After an unexpected contraction in July-September, the world's third-largest economy is projected to rebound, with a much-awaited boost to the services sector that had lagged behind manufacturers in recovering from the COVID-19 fallout.

The outlook for capital spending was cut from the previous survey, with companies planning to increase investment by 15.1 percent in fiscal 2022 from a year earlier. The pace is still the fastest since December 1989, the BOJ said.

Firms expect prices to rise a record 2.7 percent in the year ahead. That momentum will likely ease somewhat but prices are expected to rise 2.2 percent three years from now and 2.0 percent five years ahead.

Japan has seen inflation accelerating in recent months, prompting the government to take steps to ease the pain on households. Core consumer prices jumped 3.6 percent in October, a roughly 40-year high, and stayed above the BOJ's 2 percent target.

The BOJ's ultralow rate policy has come under greater scrutiny as market participants have used the diverging policy paths between it and other central banks that are raising interest rates as a cue to sell the yen.

Toru Suehiro, chief economist at Daiwa Securities Co., said the key to any monetary policy exit is "the strength of the economy that will make wage growth possible."

"The latest data reduced such expectations," Suehiro added.

Companies in the survey expect the U.S. dollar to average 130.75 yen for the current business year to next March, sharply higher than 125.71 yen in September. But the average rate is still lower than around 135 yen on Wednesday.

The BOJ surveyed 9,235 companies, of which 99.4 percent responded between Nov. 10 and Tuesday.

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