By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) -Business confidence at big Japanese manufacturers hit a near two-year high in the three months to December, a closely watched central bank survey showed, suggesting the economic conditions needed to unwind massive stimulus were falling into place.
Big non-manufacturers' sentiment also improved to levels not seen since 1991, the quarterly "tankan" survey showed on Wednesday, dispelling analysts' concerns that weak consumption could weigh on the fragile economic recovery.
"The Tankan presents a strong case for the Bank of Japan to withdraw ultra-loose monetary policy," said Marcel Thieliant, head of Asia-Pacific at Capital Economics, pointing to signs of tightening labour market conditions.
The headline index for big manufacturers' mood rose to +12 from +9 three months ago, the tankan showed, improving for the third straight quarter. It slightly exceeded a median market forecast for +10 and was the highest level since March 2022.
Automakers' mood improved sharply in a sign manufacturers were benefiting from the boost to profits from a weak yen and easing supply constraints.
Big non-manufacturers' sentiment index rose to +30 from +27, improving for the seventh straight quarter and hitting the highest level since November 1991, the survey showed. It was above a median market forecast for a reading of +27.
"Pent-up demand after the pandemic and recovering inbound tourism gave a big boost to non-manufacturers' moods. There's no indication that consumption could falter," said Yasunari Ueno, chief market economist at Mizuho Securities.
The gloomy global outlook, however, could weigh on the economy with big manufacturers and non-manufacturers expecting conditions to worsen three months ahead, the survey showed.
Big firms expect to increase capital expenditure by 13.5% in the current fiscal year ending in March 2024, compared with a median market forecast for a 12.4% increase, the survey showed.
The tankan is among key data the BOJ will scrutinise for clues on whether companies will keep raising prices and wages enough for Japan to sustainably hit its 2% inflation target - a prerequisite for ending ultra-easy policy.
The tankan showed companies expect inflation to exceed 2% one-, three- and five-years ahead. It also showed companies felt labour conditions remained tight.
"There's nothing in this tankan that serves as an impediment for the BOJ to end negative interest rates," said Ueno of Mizuho Securities.
The data is among factors the BOJ board will examine at its next policy-setting meeting concluding on Tuesday. The central bank will release fresh quarterly growth and inflation forecasts at a subsequent rate review on Jan. 22-23.
More than 80% of economists polled by Reuters in November expect the BOJ to end its negative rate policy next year with half of them predicting April as the most likely timing. Some see the chance of a policy shift in January.