Japanese business sentiment turned positive in the third quarter as companies restored supply chains hit by the March earthquake, the Bank of Japan's tankan survey showed on Monday, but a strong yen and Europe's debt crisis cloud the outlook.
Large manufacturers expect conditions to improve in the next three months, according to the quarterly survey for September, although the pace of expected improvement is slow in a sign of the increasingly tentative nature of Japan's economic recovery.
Europe's debt crisis will keep the Bank of Japan edgy but the central bank is expected to hold off on easing monetary policy at its rate review on Friday unless a turn of events unleash a shock market reaction that threatens Japan's recovery prospects.
The central bank, however, could come under pressure to increase asset purchases further to support growth in coming months, as the government has been slow to compile a spending package for the bulk of reconstruction from the quake.
The headline index for big manufacturers' sentiment improved to plus 2 in September from minus 9 in June, the tankan survey showed, matching a median market forecast.
The survey is considered a good indicator of broad growth trends in the Japanese economy.
The index for December was seen at plus 4, roughly matching a median estimate of plus 3, showing firms expect conditions to improve further.
The world's No. 3 economy likely emerged from recession as it recovers from a slump after the March earthquake. But growth remains modest with economists expecting a bigger slowdown in the final months of the year than previously thought.
Worries about a global recession, Europe's debt crisis and persistent yen gains have cast doubt on the central bank's view that external demand can help Japan's economy recover toward the end of this year.
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