Confidence among Japan's largest manufacturers sagged for a second quarter on rising costs and supply constraints, though the service sector was boosted by economic reopening, a key survey showed on Friday.
The Bank of Japan's closely watched Tankan survey showed confidence among large manufacturers at plus nine, below expectations of 12 and sharply lower than the 14 in the March survey.
A positive figure means more manufacturers see business conditions as favourable than those that consider them unfavourable.
The survey reaches about 10,000 firms and is considered to be the broadest indicator of how Japan Inc. is faring.
Corporate Japan has faced several problems as the Ukraine war pushes up oil prices amid general inflation that has boosted raw material prices.
A global supply chain crunch as well as China's stringent anti-COVID measures have also hampered manufacturing activity.
The yen has depreciated quickly in recent months, meaning imported food and energy products are growing more expensive in addition to general price increases.
Japan's large non-manufacturers, however, are more confident as pandemic-related restrictions are lifted, encouraging domestic travel and gradually opening its borders for foreign tourists.
The survey found their confidence at a reading of 13, compared with the March survey's nine.
The survey also showed that more businesses expect to raise their prices to reflect increasing costs, with large manufacturers seeing consumer prices rising 2.0 per cent a year from now.
The survey also showed that more businesses expect to raise their prices to reflect increasing costs, with large manufacturers seeing consumer prices rising 2.0% a year from now
A parts supply shortage, including semiconductors, drove down sentiment among large producers of cars and machinery, key drivers of the economy, Stefan Angrick, senior economist at Moody’s Analytics, wrote in a note.
"Current sentiment seems a tad better than expected, but the outlook is still fragile," he wrote.
"All things considered, overall business sentiment isn't looking too bad, but with forecasts pointing to renewed declines in the months ahead, a cautious view is warranted," he said.
Separately, the internal affairs ministry said Japan's unemployment rate edged up to 2.6 per cent in May from 2.5 per cent in April.
Japan's jobs market has been improving in recent months as the nation's economic activity picks up pace, NLI Research Institute said in a note.
"With the end of (Japan's strict anti-COVID measures), individual consumption is picking up, particularly dining and travelling. The employment situation should continue to improve if these restrictions remain lifted," it said.