TOKYO (REUTERS) - Japanese manufacturers' mood slid in July for the first time in eight months after June had the best reading in more than two years, a Reuters poll showed, as China's slowdown clouded the outlook for the export-reliant economy.
The index of sentiment derived from a monthly Reuters survey of manufacturers fell by 2 points to plus 13 in July, a third straight month of positive readings showing optimists outnumbered pessimists.
The index is expected to rise again to plus 15 in October in the Reuters survey, which is strongly correlated with a closely watched quarterly Bank of Japan tankan survey.
While expectations for Prime Minister Shinzo Abe's reflationary policies still supported corporate morale, many complained of sluggish demand, noting the effects of "Abenomics"had yet to be seen.
Slowing growth in China - Japan's biggest trading partner - added to respondents' concerns.
"The domestic market remains sluggish except for some particular sectors. On top of that, the Chinese market has cooled," one chemicals maker said in the July 1-12 poll of 400 big and medium-sized firms, of which 277 responded.
"Market conditions for nonferrous and precious metals have been declining since this spring, and China's economy shows no signs of improvement. Therefore demand remains stagnant," one nonferrous metals maker said.
The decline in the Reuters Tankan's index for manufacturers was driven in part by exporting sectors including makers of chemicals and steel/nonferrous metals.
In the previous month, the manufacturers' index hit its highest level since March 2011, just before a devastating earthquake struck the country's northeast.
The service sector gauge also fell 2 points in July to plus 18, after hitting its best reading since May 2007 in the previous month. The index is seen rising to plus 25 in October.
The BOJ's tankan issued on July 1 showed manufacturers' mood turned positive in April-June for the first time in nearly two years and was seen rising further on the feel-good mood generated by Abe's reflationary policies.
The central bank kept monetary policy steady last Thursday and offered a more optimistic view of the economy on growing signs that the benefits of a weak yen and the government's reflationary policies are spreading.
Japan's economy grew at an annualised 4.1 percent rate in the first quarter, led by firm private consumption and a pickup in exports. But China's slowdown and the potential impact from the US Federal Reserve's tapering of monetary stimulus on emerging economies cloud the outlook.
China's annual GDP growth slowed to 7.5 percent in April to June - the ninth quarter in the last 10 that expansion has weakened - putting pressure on Beijing to quicken reforms rather than slow them to take up the economic slack.
Growth prospects for the rest of the year look grimmer if global demand remains weak and if last month's unprecedented Chinese money market crunch, which saw short-term interest rates spike to record highs, eventually feeds into the real economy through higher lending rates.