Support for 'Abenomics': Japan Prime Minister Shinzo Abe's stimulus policies have been received well..

Support for 'Abenomics': Japan Prime Minister Shinzo Abe's stimulus policies have been received well.. Photo: Bloomberg

Japanese big manufacturers' business confidence improved over the three months to December to its highest level in six years, a central bank survey showed, boding well for Prime Minister Shinzo Abe's stimulus policies aimed at ending 15 years of grinding deflation.

But the Bank of Japan's quarterly "tankan" survey showed companies were less optimistic about the outlook and cautious of boosting capital expenditure, highlighting their uncertainty on whether the economy will sustain its momentum.

The headline index for big manufacturers' sentiment improved 4 points from the previous quarter to plus 16, the tankan survey showed on Monday, slightly above a median market forecast of plus 15. It was the fourth straight quarter of improvement and the highest level since December 2007.

The positive reading, which means optimists outnumbered pessimists, underscored the BOJ's view that the economy is recovering moderately and will likely allow it to hold off on expanding stimulus in coming months, analysts say.

Service-sector mood also improved as consumers rushed to beat a sales tax hike next April with the big non-manufacturers' index up 6 points to plus 20, better than a median forecast of plus 16. That was the highest level since December 2007.

But big manufacturers and non-manufacturers both expect business conditions to worsen slightly in the three months to March, the survey showed.

Big firms are seen raising capital spending by 4.6 per cent in the current business year to next March, down from 5.1 per cent seen in the previous tankan and less than a median market forecast for a 5.5 per cent increase.

Japan's economy outpaced its G7 counterparts in the first half of this year as Abe's stimulus policies boosted business and household sentiment. Growth slowed in July-September on soft exports, but analysts expect it to accelerate again in the run-up to the sales tax hike.

Public works spending is also likely to offset the continued weakness in exports, thanks to a fiscal stimulus package aimed at softening the blow of higher sales tax.

The BOJ has said the economy can handle the pain from the sales tax hike and meet the bank's goal of achieving 2 per cent inflation in roughly two years, due in part to the effect of its aggressive monetary stimulus launched in April.

The central bank is thus widely expected to keep monetary settings unchanged at its next rate review on December. 19-20.