Japanese Business Sentiments Improve Less Than Expected in the First Quarter

Confidence among major Japanese firms improved in the three months ending March but the reading failed to meet expectations as the country looks to recover from its recent economic slump.

The Bank of Japan's quarterly Tankan Survey headline index picked up to -8 in March, from -12 recorded in December. This was below the median estimates of a -7 reading.

The improvement appears to be supported mostly by the recent weakness in the yen, which has plunged to record lows against the dollar since November, and the boost in the stock markets.

The survey also showed that major businesses plan to reduce their capital expenses by 2 percent in the fiscal year beginning 1 April, below expectations of a 2.3 percent cut.

"The sentiment is getting better broadly, but the improvement isn't as great as expected," Hideki Matsumura, senior economist at Japan Research Institute was quoted by the Wall Street Journal.

"[For a further improvement], exports need to increase, pushing up capital investment. Domestic demand appears solid. The rest depends on how fast external demand will improve".

Analysts also point out that although the weak yen has boosted sentiments, the currency needs to remain at lower levels for a longer period to have a significant effect on exports and domestic demand.

The data comes ahead of Bank of Japan's first policy meet under its new governor Haruhiko Kuroda, where it is expected to announce aggressive monetary easing measures that are in line with Prime Minister Shinzo Abe's pro-stimulus approach.

The Tankan survey is considered a key indicator that has a crucial role in monetary policy formulation.

Japanese economy had come under pressure after the recent global economic slowdown hurt external demand. But conditions appeared to steady in the fourth quarter of 2012, with GDP picking up 0.2 percent year-on-year after the pro-stimulus Prime Minister Shinzo Abe took office.

Economists suggest that the economy may be on the track to recovery, as Abe's bold moves could boost activities.

This week, the Organization for Economic Cooperation and Development (OECD) said that the country could record a 3.2 percent growth in the first quarter, marking a sharp upward revision from its earlier estimate of 1.2 percent.