TOKYO The mood of Japanese manufacturers probably worsened slightly in the three months to June but it will likely improve in the following quarter, reflecting expectations for a gradual recovery after a sales tax hike put a dent in consumer spending.
Big firms are expected to raise their capital spending in the current fiscal year more than they previously planned, suggesting more companies think that investing in plant and equipment will pay off in the future.
The Bank of Japan's tankan quarterly survey is expected to show the headline index for big manufacturers' sentiment worsened by two points from three months ago to plus 15, the Reuters poll of 19 economists showed.
That would be the first time in more than a year that the sentiment index worsened as an increase in the nationwide sales tax on April 1 placed a temporary drag on consumer spending.
Service-sector sentiment is also expected to dip, with the index for big non-manufacturing companies expected to have fallen by five points to plus 19, also the first decline in more than a year.
Analysts said improving overseas economies and Japanese firms' strong demand for labor show that business sentiment will remain solid, which means the BOJ does not need to contemplate additional stimulus.
"I don't expect business sentiment to deteriorate much," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co.
"The government's policies are working and the economy is out of deflation. No one expects a recession, so there is no need for manufacturers' output to fall."
The business mood among both big manufacturers and non-manufacturers is expected to strengthen over the next three months in a sign firms expect the economy to shake off the impact of the increase in the sales tax to 8 percent from 5 percent.
The central bank's closely watched tankan survey, due on July 1, is expected to show that big firms will raise their capital spending by 6.0 percent for the fiscal year that began in April, more than a 0.1 percent increase in the previous survey.
Industrial production in May rose 0.9 percent, rebounding from a 2.8 percent fall in the previous month, according to a separate survey, showing that manufacturing is starting to regain momentum.
The industrial production data are due at 8:50 a.m. on June 30 (2350 GMT on June 29).
The world's third-largest economy will likely contract temporarily in April-June on a pullback in consumption after the tax hike but is seen returning to moderate growth in following quarters.
Last April, the BOJ announced an intense burst of monetary stimulus, pledging to buy assets aggressively to accelerate consumer inflation to 2 percent in about two years.
BOJ Governor Haruhiko Kuroda has said the nation has been steadily moving towards achieving the price target.
The BOJ will hold its next monetary policy meeting on July 14-15.
(Editing by Kim Coghill)