Big Japanese manufacturers turned optimistic in the third quarter following a rapid recovery in output after the deadly March 11 earthquake and tsunami, but scaled back forecasts for the months ahead on the yen's strength and as global slowdown looms.
The survey comes ahead for the Bank of Japan's quarterly tankan poll due on October 3, one of the central bank's key guides in steering monetary policy.
Three months ago, companies were overly pessimistic but that pessimism has receded thanks to a quick recovery in supply chains disrupted by the March earthquake, said Junko Nishioka, chief economist at RBS Securities in Tokyo.
But the downward revision in large manufacturers' forecast for October-December and a further slowdown expected for the following quarter are clear evidence of the blow from the yen's having appreciated beyond their assumptions.
This suggests companies will be similarly cautious about the outlook in the Bank of Japan's tankan survey due next month, keeping pressure on the BOJ to keep an easy policy, Nishioka said.
The index of sentiment at large manufacturers improved to plus 10.3 in July-September from minus 23.3 in April-June, the joint survey by the Ministry of Finance and the Economic and Social Research Institute showed on Monday.
Companies also notched up their capital spending forecasts for the fiscal year to March 2012 to a 5.4 percent increase from a 4.9 percent rise seen in the previous quarterly survey.
In another sign of improving business conditions, Japanese wholesale prices that reflect input costs rose 2.6 percent in the year to August, less than the median forecast for a 2.7 percent rise and less than in July.
However, the forecasts for the index in the fourth quarter were scaled back to plus 13.6 from 17.4 in the last survey.
The March quake and tsunami that wiped out whole communities alongside Japan's northeastern coast and killed 20,000, knocked the world's third biggest economy into its second recession in three years.
Economists expect the economy to resume growing this quarter after three consecutive quarters of contraction, but the outlook further ahead appears increasingly dim due to the strong yen and faltering global economic growth.
The Group of Seven meeting this weekend failed to dispel investor fears, offering little in terms of coordinated action that could help sustain economic growth while much of the developed world grapples with excessive government debt amassed during the 2008-2009 financial crisis.
Japan's business sentiment index measures the percentage of firms that expect the business environment to improve from the previous quarter minus the percentage that expect it to worsen.
(Writing by Tomasz Janowski; Editing by Joseph Radford)