Japan business mood steady in March, but seen weakening-Reuters Tankan
* Manufacturers' March sentiment index +18, service sector +31
* Index seen down due to drop in demand after sales tax hike
* BOJ tankan likely show steady readings for March sentiment
TOKYO, March 19 (Reuters) - Confidence at Japanese manufacturers held steady in March but is seen weakening over the next three months, a Reuters poll showed on Wednesday as firms prepare for a sales tax rise next month that some expect will hurt economic momentum.
Sentiment at non-manufacturers, including retailers who have benefited from consumers bringing forward purchases to beat the tax rise, rose 1 point to a record high of plus 31 points, the Reuters Tankan for March showed.
However, the monthly Reuters survey, which closely correlates with the Bank of Japan's tankan, showed the service-sector mood index is expected to drop to plus 14 points by June.
Compared with three months ago, the Reuters Tankan showed sentiment for both manufacturers and service-sector firms had improved slightly, pointing to steady readings in the BOJ's quarterly tankan.
A total of 255 firms responded to the poll of 400 big- and medium-sized firms taken March 3-14. Indexes are calculated by subtracting the percentage of pessimistic responses from optimistic ones.
The BOJ will release its March quarter tankan on April 1, the same day the sales tax rises to 8 percent from 5 percent.
Any weakness in the BOJ tankan would increase calls for additional stimulus from the BOJ, even though the central bank has said the economy should be able to weather the tax rise.
"Our business conditions are good because the yen is stable at above 100 yen per dollar and domestic demand is rising before a sales tax hike," a machinery maker said in its survey response.
But other firms are seeing margins squeezed by higher import costs and sluggish demand in China and other Asian markets.
"China's economy remains sluggish, and we're also concerned that the U.S. economy may lose momentum and the global economy may slow due to friction between Russia and Western countries over Ukraine," said a non-ferrous metal company.
In the Reuters Tankan, the index of sentiment among manufacturers held at plus 18, unchanged from February and up 1 point from December. At plus 31 points, the service-sector gauge was up 6 points from three months ago.
The indexes for manufacturers and non-manufacturers are expected to weaken to plus 12 and plus 14 respectively by June.
Among manufacturers, the autos/transport equipment sector led the decline, with its sentiment index seen falling from plus 13 in March to minus 14 in June.
Retailers are also expected to be hit hard by the sales tax rise. Their sentiment index jumped to plus 38 in March from plus 12 in the previous month on a rush of last-minute demand, but it is seen plunging to minus 19 in June.
The BOJ's December-quarter tankan showed business sentiment hit a six-year high, but big manufacturers and non-manufacturers expected business conditions to weaken in March.
At a policy review last week, the BOJ maintained its massive monetary stimulus and kept its upbeat view on the economy, although it downgraded its assessment of exports.
Policymakers and many private-sector economists expect the economy to slow temporarily in the April-June quarter after the tax rise before rebounding in July-September.