Sentiment among large Japanese manufacturers improved in the quarter ended June, the Bank of Japan said on Monday, although confidence remained weak amid a lumbering economic recovery.
Large manufacturers' sentiment rose to "minus one" from "minus four" in the previous quarter, according to the central bank's Tankan survey, offering some positive news for the world's third-biggest economy.
The figures represent the percentage of firms saying business conditions are good minus those saying they are bad, and are a key measure used by the BoJ in formulating monetary policy.
The result was better than the median forecast for "minus three" in a poll of economists by Dow Jones Newswires, and came after the central bank gave an upbeat outlook for Japan's economy, although Europe remained a key risk factor.
Maiko Noguchi, senior economist at Daiwa Securities said the Tankan "was positive as it shows that economic recovery is proceeding steadily".
Greater erosion in business confidence would have heaped pressure on the BoJ for further easing measures, she said, "but today's result will take the pressure off and make it possible for the bank to 'wait and see' before taking more action".
Last month, the central bank held off fresh easing steps, holding key interest rates steady at between zero and 0.1 percent and leaving unchanged a 70 trillion yen ($877 billion) asset purchase programme.
Japan has seen a mixed bag of economic data lately, with domestic demand and the employment picture improving, while factory output tumbled 3.1 percent in May amid a slump overseas, particularly in the eurozone.
The health of the 17-nation bloc has significant implications for Japan, which is a major exporter to Europe and holds large amounts of its public debt.
A flight by investors from the euro has also helped push up the value of the yen, making Japanese goods relatively more expensive overseas, after the unit hit record highs against the dollar late last year.
But huge reconstruction-related spending in Japan following the March 2011 quake-tsunami disasters and a government subsidy for eco-friendly vehicles have helped prop up the economy.
"Manufacturers' confidence unexpectedly improved despite a levelling-off in production and the yen's renewed strength," Naoki Murakami, chief economist at brokerage Monex, said in a note.
"We don't see signs that ripples from a slowdown in the global economy are reaching Japan. (The Tankan results) endorsed the Bank of Japan's judgement that the Japanese economy is on a recovery path."
However Tokyo has warned that the eurozone crisis is a major hurdle to Japan's recovery, while Premier Yoshihiko Noda said at the weekend his nation's huge public borrowing means it faces similar risks as debt-plagued Europe.
In the Tankan survey, sentiment among large non-manufacturing firms also improved, rising to "plus eight" from "plus five".
Large manufacturers expect further improvement in the next survey and are forecasting an average 10.1 percent profit rise in the current fiscal year, the bank said.
Big non-manufacturers, by contrast, expect a 1.8 percent decline in profits, according to the survey based on data from nearly 10,800 companies.