By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) - Japanese business confidence improved for a fifth straight quarter in the three months to December to hit an 11-year high, a central bank survey showed, a sign the economy is gathering momentum from robust exports and booming corporate profits.
But big manufacturers and non-manufacturers expect business conditions to worsen in the next three months, highlighting their reluctance to embrace the improved operating environment via increases in wages and investment.
Nudging cash-rich firms into spending more on wages has been a priority for premier Shinzo Abe's efforts to vanquish the deflation that has plagued Japan for nearly two decades.
As part of those efforts, Abe's ruling coalition approved a plan on Thursday to slash the corporate tax rate - but only for companies that increase spending - a move that could brighten business sentiment in coming months.
The closely watched "tankan" survey also showed capacity constraints and staff shortages were increasing price pressures, which would help the Bank of Japan achieve its elusive 2 percent target but could squeeze corporate margins ahead.
Still, many analysts doubt wages will rise much and therefore expect any interest rate hikes to be some time away.
"The tankan results support the BOJ's bullish economic view backed by global economic recovery," said Hidenobu Tokuda, senior economist at Mizuho Research Institute.
"But prices remain weak and far below the BOJ's price target. There's no way it can move to tighten policy anytime soon," he said.
The headline index for big manufacturers' sentiment stood at plus 25 in December, the tankan showed on Friday, up from plus 22 in September and slightly higher than a median market forecast for plus 24.
It matched the high reached in December 2006, when a booming economy allowed the BOJ to end a previous spell of quantitative easing and zero interest rates.
An index measuring big non-manufacturers' sentiment was unchanged from September at plus 23, matching forecasts.
Big firms expect to increase capital expenditure for the current fiscal year to March 2018 by 7.4 percent, roughly in line with forecasts, the tankan showed.
PRICE PRESSURE BUILDING
The tankan showed that conditions for price and wage gains were gradually falling into place.
An index measuring employment conditions showed firms were faced with the most severe staff shortages since 1992, while their capacity to meet demand was at its tightest since 1991.
An index gauging output prices hit a nine-year high for big manufacturers, a sign that more large companies were in a position to raise prices - reflecting strong demand.
But analysts doubt whether the outlook for consumer prices will change much.
"Even looking at these figures, it doesn't provide enough energy for the BOJ to change its policy, such as, for example, changing its yield curve target or negative rates," said Hiroaki Muto, an economist at Tokai Tokyo Research Center.
The tankan will be among key data the BOJ will scrutinize at its next rate review on Dec. 20-21.
Japan's economy expanded an annualized 2.5 percent in the July-September period to mark a seventh straight quarter of expansion, supporting the central bank's recent signals that it could move away from crisis-era monetary policy.
But many analysts expect core consumer inflation, now at 0.8 percent, to slow next year unless firms pay heed to Abe's calls to hike wages by 3 percent.