Business sentiment improved in July-September from a 11-year low hit three months ago, the Bank of Japan's key survey showed Thursday, in a sign the economy is gradually emerging from the devastating hit from the coronavirus pandemic.
The data offers some hope for new Prime Minister Yoshihide Suga's efforts to achieve an economic revival from the crisis and pave the way for hosting next year's Tokyo Olympic Games.
But factory activity remained shaky and corporate capital expenditure plans were at their weakest since the 2009 global financial crisis, underscoring the challenge of pulling the world's third-largest economy sustainably out of its slump.
As the pandemic's pain persists, a ruling party heavyweight signaled the nation's readiness to compile a "large-scale, bold" additional spending package.
The headline index for big manufacturers' sentiment improved to minus 27 in September versus minus 34 in June, which was the lowest level since June 2009, the BOJ's closely watched tankan quarterly survey showed.
The result compared with economists' median estimate of minus 23 in a Reuters poll. While still indicating most companies' outlook remains downbeat, it was the first sign of improvement in 11 quarters.
"The big manufacturers' index turned out a little weaker than expected, reflecting an uneven recovery," said Takeshi Minami, chief economist at Norinchukin Research Institute.
"While automakers' sentiment rebounded sharply, confidence among capital goods makers is weak. Capital expenditure may weaken in coming months as companies put off nonurgent spending plans amid slumping profits," he said.
The sentiment index for big nonmanufacturers also recovered to minus 12 from minus 17 in June, which was the worst reading since December 2009. Analysts polled by Reuters expected the index to hit minus 9.
Manufacturers and nonmanufacturers expect business conditions to improve three months ahead, the tankan showed.
The survey also showed big firms plan to raise their capital expenditure by 1.4 percent in the current business year to March 2021, versus 3.2 percent projected in the June survey and economists' median estimate of a 1.3 percent increase.
Total spending plans by companies of all size and industry for the current fiscal year fell 2.7 percent, the biggest drop marked in any September survey since fiscal 2009, the tankan showed.
"With uncertainty over the pandemic looming, it's doubtful whether corporate sentiment will recover medium- to long-term," said Yuichi Kodama, chief analyst at Meiji Yasuda Research Institute.
"The economy may stagnate after the effects of various government stimulus measures run their course," he said.
Factory activity posted its longest streak of declines on record in September, a separate private survey showed on Thursday, underscoring the huge toll the health crisis has taken on the manufacturing sector.
Japan suffered its biggest economic slump on record in the second quarter as the pandemic and anti-virus measures crippled demand, and analysts expect any rebound to remain modest as fears of a second huge wave of infections weigh on consumption.
The BOJ has kept monetary policy steady since ramping up stimulus in March and April to cushion the economic blow.
BOJ Gov. Haruhiko Kuroda has said the central bank stands ready to loosen policy further if Japan's recovery is derailed. But many analysts expect the central bank to stand pat for the time being given its limited tool-kit to prop up growth.
The tankan's sentiment indexes are derived by subtracting the number of respondents who say conditions are poor from those who say they are good. A negative reading means pessimists outnumber optimists.