Japanese businesses gained in confidence in the three months to June, a Bank of Japan survey showed on Friday, suggesting healthy domestic demand and reduced inventories are helping them ride out a slowing in export growth.
The tankan survey's headline figure, the June diffusion index for big manufacturers, rose to plus 18 from plus 14 in March. Economists had forecast plus 15.
The results offered some relief after recently weaker export and industrial output figures cast doubt on whether the economy can keep recovering at the healthy pace seen in the first three months of the year, when it grew an annualised 4.9 percent.
"This shows that domestic demand may be lending much more strength to the economy than we had thought and making up for weakness in the high-tech sector and exports," said Seiji Adachi, a senior economist at Deutsche Securities.
The diffusion index in the tankan, shorthand for "short-term economic outlook survey of enterprises in Japan" is derived by subtracting the percentage of firms reporting unfavourable conditions from those reporting favourable conditions.
Indices for non-manufacturers and smaller firms also generally improved in the quarterly survey.
Underscoring the stronger confidence, the tankan also showed companies upgraded their capital spending plans for the business year that started in April.
Large firms plan to raise spending by 9.4 percent this business year, compared with their plans three months ago for a rise of just 1.0 percent. That was also much higher than the market's consensus forecast for a 4.5 percent rise.
"The positive surprise this time was capital spending," said Hideo Kumano, a senior economist at Dai-ichi Life Research Institute, noting that projected gains in spending exceeded the 1.0 percent rise expected by large firms in recurring or pretax profits.
"Until now, spending would only increase as much as profits. It looks like the capital that's been saved up is now heading towards investment," he said.
Financial markets are now awaiting Japanese May machinery orders data, due on July 8, for more signs on the outlook for capital spending. A Reuters poll produced a median forecast for a 2.5 percent month-on-month decline in core orders, or a 1.6 percent rise from the same month a year earlier.
The tankan, however, also showed the large manufacturers' outlook index for September at plus 17, suggesting businesses feel the economy has yet to fully emerge from a soft patch.
The high-tech sector is still struggling to cope with weak global demand. Slower export growth to the rest of Asia, especially China, and stubbornly high oil prices have also clouded the outlook.
Exports to China - which account for 13 percent of Japan's global exports, second only to 22 percent to the United States - have slowed this year as Beijing sought to curb overheating in China's economy, denting demand for raw materials and machinery.
Many economists, however, say businesses have contained the damage by swiftly paring down inventories.
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