TOKYO, Apr 02 (Reuters): Japanese business sentiment worsened for the first time in two years in the three months to March, a closely watched central bank survey showed on Monday, as rising raw material and labour costs weigh on an otherwise steady economic recovery.
A strong yen and simmering fears of a trade war, triggered by U.S. President Donald Trump's move to impose tariffs on Chinese goods, could further undermine corporate morale if threats of retaliation escalate, analysts say.
But few analysts expect the economic recovery to falter as business confidence remains at a decade-high level and companies plan to increase capital expenditure.
"Yen gains since late January has eroded manufacturers' sentiment but solid global economic fundamentals helped offset the pain. Overall, you can say that business confidence held firm," said Yuichiro Nagai, an economist at Barclays Securities. "Fears of a global trade war have had a limited impact on business sentiment so far. But depending on development of U.S. trade policy, protectionism could weigh on the outlook." An index measuring big manufacturers' confidence fell by two points to plus 24 in March, the Bank of Japan's quarterly "tankan" survey showed, roughly matching a median market forecast of plus 25.
Non-manufacturers' sentiment worsened by two points to plus 23 against a median forecast of plus 24, deteriorating for the first time in six quarters.
Both big manufacturers and non-manufacturers forecast business conditions to sour three months ahead, the tankan showed, reflecting looming uncertainty over the fallout from Trump's trade policy and a strong yen.
Big manufacturers expect the dollar to move around 109.66 yen on average during the year that began in April, well above current levels around 106 yen.
This means that if yen gains persist, manufacturers may be forced to slash their optimistic profit forecasts - a worrying sign for Prime Minister Shinzo Abe's efforts to spur growth with reflationist policies.
Labour shortages also weighed on sentiment, as the economic recovery and a dwindling working-age population push the jobless rate to a near 25-year low.
A tankan index measuring capacity constraints showed that companies saw the job market at its tightest since 1991. Some firms in the construction, restaurant and hotel industries complained that labour shortages were taking a toll on their businesses, a BOJ official briefing reporters on the data said.
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