2018.04.0200:37:00UTC+00Japan Business Sentiment Drops in the First Quarter

Japanese business sentiment worsened in the three months to March, according to a closely watched central bank survey, as rising raw materials and labor costs add pressure to the economic recovery.

A strong yen and simmering fears of a trade war, triggered by U.S. President Donald Trump's move to impose tariffs on Chinese goods, could further undermine corporate morale if threats of retaliation escalate, analysts say.

An index measuring big manufacturers' confidence dropped by 2 points to +24 in March, the Bank of Japan's quarterly “tankan” survey showed, roughly matching a median market forecast of +25.

Non-manufacturers' sentiment worsened by 2 points to +23 against a median forecast of +24, deteriorating for the first time in six quarters.

Big manufacturers and non-manufacturers forecast business conditions would worsen three months ahead, the tankan revealed, reflecting looming uncertainty over the fallout from Trump's trade policy and a strong yen. Big manufacturers expect the dollar to move around 109.66 yen on average during the year that began in April, much weaker than the current levels around 106 yen.

Labor shortages also weighed on sentiment, as economic recovery and a dwindling working-age population push the jobless rate to a near 25-year low.

A tankan index measuring capacity constraints showed that companies saw the job market at its tightest since 1991.

Slow wage growth and companies' reluctance to raise prices have kept inflation well below the Bank of Japan's 2 percent target.

However, the tankan showed more companies were able to pass higher costs on to consumers, a hopeful sign for the central bank.