Confidence among Japanese manufacturers slipped in March for the first time in a year, according to a closely-watched Bank of Japan survey released Monday.
But on a positive note, the quarterly "tankan" survey, which polls more than 10,000 companies, showed that large businesses plan to boost investment in the year ahead.
The quarterly "tankan" survey of corporate sentiment showed that a confidence index for large manufacturers slipped to 23 from 25 in the previous survey in December, a two-year high. Economists surveyed by Dow Jones Newswires had forecast on average that number at 24.
The index measures the percentage of companies reporting that business conditions are better minus those reporting that conditions are worse. The higher the number, the greater the portion of companies that are optimistic.
Among major non-manufacturers, the sentiment index remained unchanged at 22, slightly worse than analysts' forecast for 23.
The results sent the benchmark for Tokyo stocks down 1.5 percent, erasing gains earlier in the session.
Some analysts said the survey suggests that concerns about a slowdown in the U.S. economy - Japan's biggest export market - and recent market volatility, has made Japanese executives less confident about the future.
"Given recent U.S. economic conditions and the uncertainty of global stock markets, Japanese companies won't become optimistic about the outlook of the economy any further," said Koichi Haji, chief economist at NLI Research Institute.
The survey also showed that large businesses are planning to increase capital spending in the year that started April 1 by an average of 2.9 percent, higher than forecasts of a 1.7 percent increase.
Japan's top government spokesman brushed aside any worries about the tankan, noting that sentiment is still relatively upbeat.
"In a broad sense, there was no change to the view that favorable performance in the corporate sector is continuing," said Chief Cabinet Secretary Yasuhisa Shiozaki. "There is no change to our basic understanding that moderate economic expansion is continuing."
The tankan is closely watched as an indication of when the Bank of Japan may next raise interest rates.
But the market is not expecting the central bank to raise interest rates anytime soon after it raised the benchmark rate to 0.5 percent in February.
The central bank is likely to be cautious after last week's report on consumer prices fueled worries that the bank has raised been raised rates too quickly.
The nationwide core consumer price index, which excludes volatile food prices, fell 0.1 percent in February from a year earlier, dipping for the first time in 10 months, the government said. That undermined hopes that Japan has convincingly defeated the spiral of falling prices that had ravaged the economy for years.
Haji, of NLI Research, predicted the BOJ was unlikely to raise rates before October.
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