More Japanese companies felt business was better in March than at any time in almost seven years, a closely watched Bank of Japan report showed on Thursday, a further sign a recovery is spreading throughout the economy.
But a rising yen clouded the outlook, with firms in the BoJ's quarterly "tankan" corporate sentiment survey cautious in their forecasts for the coming three months.
The survey's diffusion index (DI) for large manufacturers improved to plus 12 in March from a revised plus 7 in December, above the median forecast of plus 10 in a Reuters poll and the highest outcome since June 1997, when the index was plus 13.
"This data will bolster improving sentiment on the economy," said Hiroshi Yokotani, an economist at Tokio Marine Asset Management.
"The gap between manufacturers and non-manufacturers is shrinking. This will also help the argument that the latest recovery is more solid than the last two recoveries, which broke off halfway," he said.
The survey showed improved confidence among non-manufacturers and small firms, confirming the recovery is broadening out beyond exporters, who have enjoyed strong demand for electronics, cars and other goods in fast-growing neighbour China.
Sentiment among big non-manufacturers was plus 5, the highest since May 1992, better than December's revised zero and above the poll forecast of plus 4.
Retailers' sentiment turned positive in March, a sign that consumer spending, which accounts for about 60 percent of the economy, is catching up with the recovery. Business services, real estate and other service industries were also more optimistic.
The tankan's indices measure business sentiment by subtracting the percentage of companies reporting unfavourable conditions from those that say they are favourable.
But the report also showed that big companies plan to trim capital spending by 0.6 percent in the business year that started on Thursday.
The tankan showed companies are cautious about the yen, with large manufacturers holding their DI forecast for June at plus 12, the same as in the March survey.
On Wednesday, the yen reached a four-year high of 103.40 yen to the dollar despite Japanese authorities having sold more than 35 trillion yen ($336 billion) since the beginning of last year to hold it down.
The strong tankan numbers kept the Japanese currency strong on Thursday, and by late afternoon it was hovering near 104 yen.
Big companies in the survey forecast an average dollar/yen exchange rate of 108.43 for the new fiscal year.
Many exporters such as electronics giant Sony Corp have made a rate of 105 yen the basis of their planning for the 2004/05 business year.
But economists said they could probably cope with a stronger currency because of strong demand.
"The numbers reflect Japan's continuing economic recovery," said Soichi Okuda, a senior economist at Sumitomo Corp. "Though the yen's strength is a concern, I don't think it will seriously hurt the economy for the time being."
The government sounded an upbeat note on the survey.