Japanese business confidence gained slightly in the latest quarter but was weaker than forecast as rising energy costs dampened sentiment, an influential Bank of Japan survey showed on Monday.
The readings in the BOJ's quarterly tankan survey were below market expectations, prompting a retreat in Japanese share prices, which had risen 17.2 percent in the quarter that ended last Friday on optimism about the economy, and knocking the yen to 16-month lows versus the dollar.
The headline diffusion index for big manufacturers in the tankan - short for "short-term economic outlook survey of enterprises in Japan" - inched up to plus 19 in September from plus 18 in June.
That was below a consensus forecast of plus 20, and the tankan's December outlook index of plus 18 was also a step back.
Since hitting a 13-year peak of plus 26 a year ago from a low of minus 38 set in 2001 and 2002, the headline number has lost momentum, although economists say the absolute level is still high historically, suggesting the economic recovery is on track.
"It was slightly softer than expected, likely due to a rise in input costs and higher energy prices," said Masaaki Kanno, managing director of research at J.P. Morgan.
"But sentiment was relatively unchanged at a high level," he said. "The (capital expenditure) level was revised up and that is quite strong. Overall, the details of the tankan appear better than the headline numbers."
The Tokyo stock market's Nikkei average fell 0.36 percent on Monday to 13,525.28, while the yen slipped to 16-month lows around 114.25 to the dollar before clawing its way back up to around 113.90.
The tankan's September index for big non-manufacturers was unchanged at plus 15.
The diffusion indexes are derived by subtracting the percentage of firms reporting unfavourable conditions from those reporting favourable ones. A reading above zero is regarded as a sign of expansion in business activity.
BOJ Governor Toshihiko Fukui said the tankan confirmed the economy's resilience.
"On the surface there is little change in the figures from the previous tankan. But this is despite the higher oil prices, which leads us to believe the economic recovery is sustainable," Fukui said in a parliamentary committee.
A top business executive concurred.
"I think the Japanese economy is definitely recovering and (the tankan) shows that the recovery is on track," Toyota Motor Corp President Katsuaki Watanabe told reporters.
The big manufacturers' DI has been positive since September 2003 after wallowing in negative territory for 2-1/2 years and falling as low as minus 38 in December 2001 and March 2002.
Economists said the tankan was just a reminder that the pace of Japan's economic recovery was not as spectacular as the stock market's rally in the last few months.
"At around plus 20...the absolute levels of the DIs are pretty high, and the figures may be telling us not to be overly exuberant," said Seiji Adachi, a senior economist at Deutsche Securities.
The tankan showed that smaller companies, which had been laggards, continued to make steady progress.
The DI for small manufacturers rose to plus 3 in September from plus 2, with the December forecast DI standing at plus 4. The index for small non-manufacturers rose to minus 11 from minus 12, with the December forecast DI at minus 12.