Business confidence among Japan's big manufacturers slipped unexpectedly in the three months to March, though an upbeat outlook and robust capital spending plans suggested continued economic growth, a Bank of Japan survey showed on Monday.
The influential quarterly tankan survey showed the headline diffusion index (DI) for large manufacturers fell for the first time in four quarters to plus 20, compared with the market's forecast of a rise to plus 23 and plus 21 in December.
Materials sectors like steel and textiles were hit by soaring oil and raw materials prices, but the data did little to cool speculation that the BOJ, which last month ended a five-year-old policy of flooding the banking system with excess funds, would soon raise interest rates from present levels near zero.
"I'm expecting the BOJ to end the zero rate policy in July-September, and today's numbers strengthened my conviction," said Takehiro Sato, executive director at Morgan Stanley.
"Employment and production capacity indices, which the BOJ closely watches, showed improvements. The output gap is likely narrowing, supporting the BOJ's cause for ending the zero interest rate policy."
Supporting such views, big manufacturers expected conditions to improve over the next three months, with their outlook DI for June at plus 22.
The BOJ next holds a monetary policy meeting on April 10-11, although it is not expected to raise rates just yet as it has yet to finish mopping up excess liquidity in the money market that was left as the legacy of quantitative easing.
Companies are also wary of rising borrowing costs. The tankan DI for big firms' borrowing rates jumped to plus 10 in March from plus 2 in December -- the highest reading since September 2003 and indicating that more firms believe borrowing costs will rise. The DI for the June outlook was plus 32.
The yen weakened but the Tokyo stock market's Nikkei average gained more than 1 percent, although steel stocks were weak on the tankan figures.