TOKYO Japanese business sentiment worsened sharply in the first quarter and next fiscal year's capital expenditure plans were the weakest since 2009, suggesting recent financial market turbulence and sluggish global demand were taking a toll on a fragile economic recovery.
Confidence soured for both manufacturers and service-sector firms for the first time since the second quarter of 2014, when private consumption took a hit from an increase in sales tax in April of that year.
The sentiment data keeps pressure on policymakers to deploy additional fiscal and monetary stimulus measures to reflate an economy that is skirting another recession.
The Bank of Japan meets for a rate review next week, while premier Shinzo Abe has signaled that delaying a scheduled second hike in the sales tax next year could be a real possibility.
An index measuring large manufacturers' sentiment swung to minus 7.9 in January-March from plus 3.8 in October-December, worsening for the first time in three quarters, according to a joint survey by the Ministry of Finance and a research arm of the Cabinet Office.
"Weak exports and the yen's appreciation appear to have affected manufacturers' sentiment," said Takumi Tsunoda, senior economist at Shinkin Central Bank. "Overall, the data suggests companies don't have a positive outlook for the global economy."
The index measuring big manufacturers' sentiment three months ahead stood at minus 3.5, a sign the gloomy outlook may discourage companies from boosting wages or capital expenditure, given sluggish demand in China and other emerging Asian markets.
Underscoring weakness in domestic demand, non-manufacturers' sentiment also worsened for the first time in seven quarters to minus 0.7.
Companies expect capital expenditure to have risen 8.8 percent in the current fiscal year ending in March, but see it shrinking 6.6 percent in the coming business year, the survey showed.
The spending plan for next fiscal year would be the weakest since a 28.5 percent drop marked for fiscal 2009, when the global economy was reeling from the financial turmoil caused by the collapse of Lehman Brothers in 2008.
Economy Minister Nobuteru Ishihara put on a brave face, stressing that the hit to sentiment from volatile markets could be offset by Abe's stimulus policies aimed at generating a positive cycle of rising corporate profits leading to higher spending.
"The sentiment data partly reflects recent volatility in stocks and the currency market. However, it's not all bad news," Ishihara told a news conference after the data was issued.
"I think companies are willing to invest given the low interest rate environment we are in now."
Japan's economy, the world's third-largest, shrank in the final quarter of 2015 as slow wage growth and sluggish global demand hurt consumption and exports.
While many analysts expect growth to have rebounded modestly in the current quarter, the bleak outlook for global demand has led some to predict another contraction that will push Japan back into technical recession - defined as two straight quarters of economic contraction.
The sentiment index measures the percentage of firms that expect the business environment to improve from the previous quarter minus the percentage that expect it to worsen.
(Additional reporting by Izumi Nakagawa, Kaori Kaneko and Stanley White; Editing by Chang-Ran Kim and Eric Meijer)
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