TOKYO (REUTERS) - Japanese big manufacturers' confidence worsened in the three months to September and companies were cautious on the outlook, a central bank survey showed, as they felt the pinch from volatile financial markets and slumping shipments to China.
But service-sector sentiment improved for the fourth straight quarter to its highest level in more than two decades, as retailers benefited from falling energy costs and surging shoppers from China.
Big companies also maintained their bullish capital expenditure plans, a sign that they remain keen to spend their record profits on investment despite growing signs the world's third-largest economy may slip into recession.
"Capital expenditure plans remain relatively firm. We haven't heard of many firms scrapping spending plans, particularly in Japan," a Bank of Japan official briefing reporters on the survey said.
The headline index for big manufacturers' sentiment fell by 3 points from three months ago to plus 12, marking the first deterioration in three quarters, the BOJ's quarterly tankan business sentiment survey showed on Thursday (Oct 1). It compared with a median market forecast of plus 13.
The index measuring big non-manufacturers' mood stood at plus 25, up 2 points from three months ago. It was the highest level since November 1991, when the index hit plus 33.
Both big manufacturers and non-manufacturers expect conditions to worsen three months ahead, reflecting looming uncertainty on whether demand in China and other emerging markets pick up, the BOJ official said.
Still, big firms expect to increase capital spending by 10.9 per cent in the fiscal year ending in March 2016, up from their previous plan to boost spending by 9.3 per cent, the survey showed.
The mixed reading underscores the challenges premier Shinzo Abe face as he tries to break Japan out of deflation with reflationary policies by nudging firms into raising wages and expenditure.
The survey will be among key data central bank policymakers will scrutinise when they meet for two rate reviews this month - one next week, and another on Oct 30 when they release fresh long-term economic and price forecasts.
Japan's economy shrank in April-June and analysts expect growth to rebound only modestly or even contract again in the third quarter, as exports and factory output slump due to weak demand in China and other emerging Asian markets.
Inflation has ground to a halt on renewed declines in oil prices, keeping the BOJ under pressure to expand its already massive stimulus to accelerate price growth toward its ambitious 2 per cent target.