* Nikkei choppy as risk appetite is capped by BOJ tankan's weak outlook * Utility stocks drop on Hokkaido Electric's capital injection report * Banks higher on higher profit expectation By Ayai Tomisawa TOKYO, April 1 (Reuters) - Japan's Nikkei share average was choppy on Tuesday morning, with buying crimped by a sombre business confidence survey and losses in utilities on a report that Hokkaido Electric Power Co will get a capital infusion from a state-owned lender. The benchmark Nikkei added 0.2 percent to 14,850.01 in mid-morning trade after moving in and out of the red during the session. The index rose 0.9 percent to a three-week high on the previous day. The morning session provided investors with some sobering news on business sentiment. Japanese business sentiment barely improved in the three months to March and is set to sour in the following quarter, the Bank Of Japan's tankan quarterly survey showed, reflecting uncertainty over how much a sales tax hike that kicked off on Tuesday could hurt a fragile economic recovery. "Most companies are prepared to see weaker profits in the first quarter compared to the last quarter so this is not a surprise. That said, since the market saw a fiscal-year-end rally, investors are using the tankan result as an excuse to take profits," said Takatoshi Itoshima, chief portfolio manager at Commons Asset Management. On Tuesday, Japan's sales tax rose to 8 percent from 5 percent. Worries that the tax hike may make a bigger-than-expected dent in the economy has stoked speculation the BOJ will move soon to offer fresh stimulus. A spurt in spending by consumers in March seeking to beat the tax hike "is expected to cover any potential losses by retailers over the next few months," said Mariko Takemura, senior research analyst at Euromonitor. "But it remains to be seen how the tax will impact Japan's economy in the long-term." Banks were higher after the Nikkei daily reported that the stock market rally and improving corporate earnings likely pushed up total fiscal 2013 net profits at the three Japanese megabanks by 10 percent. Sumitomo Mitsui Financial Group gained 0.7 percent and was the fourth most traded stock by turnover, while Mitsubishi UFJ Financial Group added 0.4 percent and was the fifth most traded stock. The utility subsector was the biggest sectoral loser, falling 2.0 percent after the Nikkei said that Hokkaido Electric is facing a third year of financial losses and will get a capital infusion from the government-owned Development Bank of Japan. The report hurt sentiment across the utilities sector, dragging down Kansai Electric Power Co and Chugoku Electric Power Co by 3.1 percent and 2.6 percent, respectively. The broader Topix was flat at 1,202.69, and the JPX-Nikkei Index 400, a recently introduced gauge comprised of companies with a high return on equity and robust corporate governance, shed 0.1 percent to 10,887.51.