UPDATE 1-Japan manufacturers' mood set to turn optimistic-Reuters Tankan
* Manufacturers sentiment index -13, non-manufacturers +8
* Firms' mood expected to improve further due to soft yen
* Reuters Tankan highly correlated with BOJ tankan
By Kaori Kaneko and Izumi Nakagawa
TOKYO, Feb 21 (Reuters) - Japanese manufacturers' sentiment picked up for the third straight month in February and looks set to turn positive in the next few months, a Reuters poll showed, adding to expectations of a gradual economic upturn helped by a weaker yen.
Firms remained cautious about a patchy recovery in the business environment but still expect broad improvement in coming months, although a full-fledged economic recovery may take time.
The poll of 400 firms, of which 257 responded during Feb. 1-18, comes after new Prime Minister Shinzo Abe's push for aggressive monetary and fiscal policies has helped sharply weaken the yen and boost share prices to 52-month highs.
The Reuters Tankan, which closely correlates with the Bank of Japan's quarterly tankan survey, showed optimism among non-manufacturers, including retailers and construction firms, eased slightly this month but looked set to firmly rebound in May.
"The weakening in the yen is by far the biggest factor behind the improvement in the mood of manufacturers," said Yoshikiyo Shimamine, chief economist at the Dai-ichi Life Research Institute.
"This doesn't mean that they're ready to dramatically boost production just yet, but the companies are certainly hoping that the softer yen will help them increase production in the coming months," added Shimamine, who thought that the number of optimists among Japan makers in the survey will quickly rise.
THINGS ARE LOOKING UP
In the Reuters Tankan, the manufacturers' sentiment index rose by 4 points to minus 13 in February, extending a recovery from a three-year low of minus 19 in November, when sentiment was weighed down by the global economic slowdown and tensions with China over territorial disputes.
The index, derived by subtracting the percentage of pessimistic responses from optimistic ones, is expected to rebound to plus 3 in May. The last time the index was in positive territory was May 2012.
The jump was led by business sectors including oil refiners, metal products and precision machinery makers.
"Progress in the yen's weakness helped our recurring profits but a recovery in the core business is limited," one metal products/machinery firm said.
"Government economic policies have not led to an increase in domestic capital spending. But there is a high chance that capex will become active on a soft yen and Japan's strengthening competitiveness," an electric machinery company said.
The index for non-manufacturers edged down by 2 points to plus 8, but is expected to rise to plus 21 in May, led by sectors such as wholesalers, real estate/construction firms and information services. Rebuilding demand following the massive March 2011 earthquake and tsunami has supported construction-related industries.
The BOJ in January doubled its inflation target to 2 percent and made an open-ended pledge to buy assets from next year in an attempt to pull the country out of deflation.
The central bank kept monetary policy steady this month, but many expect the BOJ will gear up its policy easing after Governor Masaaki Shirakawa steps down on March 19. Prime Minister Abe plans to consider candidates for governor and two deputy positions after a trip to the United States next week.
The economy unexpectedly shrank for a third straight quarter in October-December but analysts project Japan will achieve moderate growth next fiscal year, helped by an expected recovery in global demand and Abe's expansionary policies.
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