Business confidence among major Japanese manufacturers worsened for the first time in four quarters, falling to 11 in March from 13 three months earlier, after a sharp drop in the auto sector caused by production cuts, the Bank of Japan's Tankan survey showed Monday.
But large nonmanufacturers, including the service sector, benefited from a revival of inbound tourism and the passing of higher costs on to consumers. The index improved for the eighth straight quarter to hit its highest level since 1991, rising to 34 from 32 in the previous survey in December.
The Tankan index represents the percentage of companies reporting favorable conditions minus the percentage reporting unfavorable ones.
The closely-watched survey comes after the BOJ in March went ahead with its first interest rate hike since 2007, ending its unorthodox monetary easing steps aimed at bringing an end to deflation, which in turn has weakened the yen.
Economists say the outcome was broadly in line with market expectations and is unlikely to impact the BOJ's policy outlook, though the yen coming under renewed selling pressure is adding a layer of uncertainty.
The average market forecast was 9 in a Kyodo News survey for the reading of the key index measuring confidence among companies such as those in the auto and electronics sectors.
"The results are not something that we should be pessimistic about. Production is expected to recover in the April-June quarter and Japanese firms have solid capital investment plans and consumers will start to feel the benefits of pay hikes," said Saisuke Sakai, a senior economist at Mizuho Research & Technologies Ltd.
Most firms had already responded to the quarterly survey before the BOJ's board members met on March 18 and 19, suggesting the full impact of their policy change decision was not fully reflected.
After avoiding a recession in the final quarter of 2023, economists expect contraction for the January-March period.
Confidence among automakers fell sharply to 13 from 28, reflecting production disruptions caused by a safety scandal engulfing Toyota Motor Corp. group companies.
Looking ahead to the next three-month period, both manufacturers and nonmanufacturers are less optimistic, with their indexes worsening to 10 and 27, respectively.
The outlook for inflation remained the same from the previous survey, with the year-on-year rise in prices forecast to be over 2 percent a year, three years and five years ahead.
The BOJ has said attainment of its 2 percent inflation target has "come into view," as strong wage growth has continued to support underlying price trends despite the effects of cost-push factors, or higher import costs, wearing off.
Still, the BOJ has signaled that further hikes will not be rapid and contingent on economic conditions.
"For now, the impact of higher rates on businesses and consumers has been limited. The BOJ will be careful not to hurt the economy, even if the yen weakens further and prompts another rate increase to cope with rising prices," Sakai said.
Japanese firms expect the dollar to trade at 141.42 yen for fiscal 2024 from April, sharply lower than around 151 yen as of Monday.
The euro is forecast to average 151.86 yen, compared with around 163 yen at present.
Labor shortages are seen as positive for wage growth as companies seek to offer better pay to secure enough workers. They could prompt firms to increase investment in automation to save labor, though a lack of labor would also mean a drag on economic growth, analysts say.
Japanese firms across all sectors plan to boost capital investment by 3.3 percent in fiscal 2024 from a year earlier when a 10.7 percent increase was planned.
They also expect acute labor shortages, especially among smaller firms that are often outcompeted by bigger ones that can provide better working conditions, according to the survey.
The BOJ surveyed 9,118 companies, of which 99.0 percent responded between Feb. 27 and Friday.
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