TOKYO (Reuters) - Japanese business confidence barely improved in the fourth quarter and is seen worsening, giving premier Shinzo Abe a grim reminder of the challenges he faces in reviving a recession-hit economy a day after his big win in Sunday's vote.
While corporate capital spending was strong, the Bank of Japan's quarterly "tankan" survey on Monday also underscored prevailing doubts among businesses about Abe's strategy to spark durable economic growth.
"With the election out of the way, Abe must shift his policies from those simply aimed at boosting sentiment to those that can actually change the way companies act. Otherwise, the benefits of Abenomics won't trickle down," said Kyohei Morita, chief Japan economist at Barclays Capital.
Abe's landslide election win gives him a fresh mandate to pursue his 'Abenomics' policies comprising massive monetary and fiscal expansion, and structural reforms.
The prime minister's strategy to end 15 years of deflation and drive sustainable growth has had only modest success so far, driving the stock market higher and boosting profits of exporters on the back of a weak yen.
However, the much-anticipated virtuous circle of higher capital investment, rising wages, domestic demand and robust growth has yet to fully materialize.
Monday's tankan embodied this slow progress, as companies retained their solid capital expenditure plans and complained of labor shortages. But sentiment among big manufacturers worsened slightly and improved only modestly among service-sector firms despite sharp rises in equities and the yen's steep falls.
With the BOJ already pumping money aggressively and the country's dire financial straits leaving it with little room for additional spending, Abe's challenge is to push through reforms to boost Japan's growth potential, analysts say.
The economy unexpectedly slipped into a recession in the third quarter, largely due to the hit to consumption from a sales tax hike in April. Since then, the signs of recovery have been mixed with exports rebounding but consumer mood slumping.
The headline index measuring big manufacturers' sentiment fell one point from three months ago to plus 12, worse than a median market forecast of plus 13, the tankan showed.
Both manufacturers and non-manufacturers expect conditions to worsen ahead, highlighting the patchy recovery.
While the weak yen benefited exporters, it hurt other firms through rising import costs.
Policymakers hope that big manufacturers, which saw profits boom thanks to the weak yen and sliding oil prices, will spend more on wages and capital expenditure.
The tankan showed big companies plan to increase capital expenditure by 8.9 percent in the fiscal year ending in March 2015, more than a median forecast of a 8.0 percent rise.
Such positive signs will give the BOJ some breathing space after having expanded its massive stimulus program in October.
The BOJ is likely to offer a more upbeat view of the economy and keep monetary policy steady this week on tentative signs of recovery, sources have told Reuters.
"Capital expenditure plans are healthy and sentiment at non-manufacturers is improving, which suggests the economy can continue to recover gradually," said Hidenobu Tokuda, senior economist at Mizuho Research Institute.
Additional reporting by Stanley White; Editing by Shri Navaratnam