TOKYO -- Sentiment among Japanese manufacturers slipped in the three months to June as the economy was caught in a tug of war between a deteriorating export climate and buoyant domestic economy, the Bank of Japan's latest Tankan survey found on Monday.
The closely watched index of sentiment among large manufacturers registered a plus 7 in the April-June period, compared with plus 12 in the previous survey. Economists had expected a reading of 9, according to a poll conducted by Nikkei group company QUICK.
The survey also suggests the downtrend is coming to an end. "Developments in the past week -- such as the resumption of talks between the U.S. and China and the U.S. and North Korea -- will help stabilize business sentiment," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
Reflecting the easing of geopolitical tensions, the safe-haven yen slid against the dollar on Monday morning, providing "a tailwind" to the BOJ's campaign to support the economy, Kumano added.
The yen is trading in the 108 range against the dollar in early Monday trading, versus the 107 range on Friday.
Declines were most pronounced in industries exposed to China's ongoing economic slowdown, such as production machinery and automobiles.
This is the second consecutive quarterly decline, with the figure now at its lowest level in almost three years.
The index measures the percentage of companies that say business conditions are favorable minus those that say the opposite. It is regarded as an indicator of Japan's economic health and of any potential monetary policy shifts.
Big manufacturers expect the diffusion index to remain unchanged at plus 7 in the next three months, the survey showed.
The central bank kept monetary policy unchanged in a meeting on June 20, but Gov. Haruhiko Kuroda said extra stimulus would be an option if prices stall and fail to meet the central bank's 2% inflation target.
The index has been on a downward trend since peaking at 25 in the December 2017 survey, reflecting a slowdown in the Chinese economy and the escalating Sino-U.S. trade dispute.
Meanwhile, the diffusion index for large nonmanufacturers improved to 23, versus 21 for the previous three-month period.
Large companies are looking to increase capital investment by 7.4% over the fiscal year starting April. In the previous survey, they expected an increase of just 1.2%.
Big manufacturers are looking for a pretax profit decline of 8.1% in the current fiscal year versus a fall of 1.3% as forecast in the previous survey. They expect the dollar-yen rate to average 109.35 versus 108.87 in the previous survey.
The BOJ has kept monetary policy unchanged since it started driving down long-term interest rates to around zero in September 2016. Observers now see the central bank as having run out of options as its ultra-easy policy has started hurting financial markets and banks.
But Kumano thinks the BOJ would likely take action if the yen were to strengthen much beyond the projected rate and touch 105 or higher.