By Daniel Leussink
TOKYO (Reuters) - Japanese manufacturers' business confidence hit a more than two-year high in May, as firms benefited from stronger overseas demand, a sign that the export-driven economic recovery remained intact, a Reuters survey showed on Thursday.
Sentiment among service sector firms turned optimistic for the first time since early last year, according to the Reuters Tankan poll, which tracks the Bank of Japan's (BOJ) closely watched tankan quarterly survey.
"Orders to the United States and Europe are recovering as a trend, as coronavirus vaccinations are starting to progress," a manager at a paper maker wrote in the survey.
Still, the improvement in confidence was somewhat patchy, with firms saying they were feeling the drag from the coronavirus pandemic. Much of Japan, including Tokyo and Osaka, are under a state of emergency until the end of the month to try to counter COVID-19 infections.
The Reuters Tankan sentiment index for manufacturers improved to 21 from 13 in the previous month, hitting its highest since December 2018, the poll conducted May 6-17 showed.
The service sector index expanded for the first time since February last year, rising to 2 from minus 3 in April, according to the survey of 482 large- and mid-sized companies, in which 236 firms responded on condition of anonymity.
The Reuters Tankan index readings are derived by subtracting the percentage of respondents who say conditions are poor from those who say they are good. A negative reading means pessimists outnumber optimists.
"Competition among rivals has been increasing due to a decrease in private order volumes," a manager at a construction firm said.
Another manager, at a services firm, said projects had been delayed or cancelled due to lower private-sector investor appetite, while public works orders were being held back in the greater Tokyo area due to the Olympics.
Japan is preparing to host the games in July although there are mounting concerns it could fuel a spike in COVID-19 infections.
Manufacturers' business confidence was especially boosted by improvements among chemicals, metal products and machinery, as well the electric machinery sectors, while the auto industry saw its sentiment expand at a less rapid rate.
"Production of new products coming about due to changes related to the coronavirus is making progress," a manager at a chemical maker said. "Orders for parts related to such products are on the rise."
Among non-manufacturers, the positive assessment of conditions was mainly due to an improvement among transport and utility firms, while the mood among retailers and wholesalers as well as other services firms remained negative, according to the survey.
Manufacturers' business confidence was seen unchanged at 21 in August, while that of service-sector firms was forecast to rise to 13, the poll showed.