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Japan’s service sector sentiment rises to highest in over three decades

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By Leika Kihara

TOKYO (Reuters) -Business sentiment among big Japanese non-manufacturers improved to a more than three-decade high in the first quarter, a closely watched central bank survey showed, offering policymakers hope that domestic demand will underpin a fragile economic recovery.

But big manufacturers’ sentiment soured for the first time in four quarters due in part to auto production disruptions, according to the tankan survey released on Monday.

The outcome is among factors the Bank of Japan (BOJ) will scrutinise in its next meeting on April 25-26, when it issues fresh quarterly growth and inflation forecasts.

The April projections will draw market attention for any clues on how soon the BOJ could raise interest rates again, after having exited its massive stimulus programme last month.

The headline sentiment index for big manufacturers stood at +11 in March from +13 in December, the tankan survey showed, compared with a median market forecast for a +10 reading.

The index gauging big non-manufacturers’ sentiment improved to +34 in March from +32 three months ago, the survey showed, slightly exceeding a market forecast of a reading of +33.

It was the highest reading since August 1991, when Japan’s economy was booming from an asset-inflated bubble, and driven by a surge in inbound tourism and a boost to corporate profits from price hikes, a BOJ official told a briefing.

“The BOJ probably remains confident about service sector sentiment,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“I think the BOJ could raise interest rates one more time this year if wage hikes accelerate.”

Big firms expect to increase capital expenditure by 4.0% in the fiscal year starting in April, against median forecasts of a 9.2% rise, the survey showed.

Both big manufacturers and non-manufacturers expect conditions to worsen three months ahead, the survey showed.

Some companies worried about global economic uncertainty and prospects of rising labour costs due to a tight job market, the BOJ official said.

Japan’s economy expanded an annualised 0.4% in the final quarter of last year, narrowly averting a technical recession as robust capital expenditure offset weaknesses in consumption.

Analysts expect the economy to have barely grown in the first quarter as rising living costs hurt consumption, and output disruptions at some auto factories weighed on industrial production.

Business sentiment and corporate spending appetite are key to whether Japan’s economy can sustain a moderate recovery and allow the central bank to raise interest rates again.

Despite the BOJ’s decision to end negative rates last month, expectations that any further rate hikes by the BOJ will be slow in forthcoming have pressured the yen and briefly pushed it to a 34-year low against the dollar.

(Reporting by Leika Kihara; Editing by Shri Navaratnam)

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