By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) - Japanese business confidence and capital expenditure plans held steady from three months ago, a closely-watched central bank survey showed, a sign companies weren't significantly worried about escalating trade frictions and global growth concerns.
But firms expect conditions to worsen three months ahead, the Bank of Japan's "tankan" quarterly survey for December showed on Friday, suggesting that the Sino-U.S. trade war and slowing Chinese demand could weigh on next year's spending plans.
Separate data on Friday showed Japanese manufacturing activity expanded in December, though export orders contracted at the fastest pace in more than two years in a sign of weakening overseas demand.
The mixed batch of data underscores the challenges the Bank of Japan faces as heightened risks keep it from exiting its radical stimulus while a lack of policy ammunition makes it difficult to battle headwinds with additional easing.
"The solid tankan results probably diminished any speculation the BOJ could ease further amid slowing global growth and adjustments in stock prices," said Masaki Kuwahara, senior economist at Nomura Securities.
"The BOJ is in no position to tighten any time soon either. We expect monetary policy to be on hold at least until the end of fiscal 2020."
The tankan's headline gauge of big manufacturers' sentiment stood at plus 19, unchanged from three months ago and beating a median market forecast of plus 17, the tankan survey showed.
The index for non-manufacturers rose to plus 24 from plus 22 in the September survey, exceeding a market forecast of plus 21 and improving for the first time in two quarters.
Both manufacturers and non-manufacturers were more pessimistic about the business outlook three months ahead, a sign they are only just starting to feel the pinch from global trade tensions.
Still, big firms plan to raise capital spending by 14.3 percent in the business year to March 2019, revised up from the previous survey and beating market forecasts of a 12.7 percent increase.
"Capital expenditure turned out solid probably because firms see the need to invest in cutting-edge technology to stay competitive and deal with labor shortages," said Takeshi Minami, chief economist at Norinchukin Research Institute.
"But you can't rule out the possibility of a downward revision in spending plans, depending on the outlook for global trade and Japan's exports," he said.
GLOOMY PICTURE AHEAD
The survey will be among the various data points the BOJ will scrutinize at its two-day rate review next week, when it is widely expected to keep monetary policy steady.
Japan's economy shrank an annualized 2.5 percent in the third quarter, suffering the worst slump in over four years, as a string of natural disasters cooled consumer sentiment and disrupted factory output.
Many analysts expect growth to have rebounded in the current quarter. But global trade frictions and a slowdown in China have raised risks to Japan's export-driven economy.
A rebound in domestic demand, which has been hit by a string of natural disasters during the summer, helped lift non-manufacturers' sentiment and softened the blow from tougher external conditions, the December tankan showed.
But sentiment worsened for machinery makers and automakers, which are industries more directly affected by China's slowdown.
Japanese machine tool orders to China slumped 36.5 percent in October from a year earlier to mark the eighth straight month of declines, data by an industry body showed last month.
The softening demand is already crimping earnings growth at Japanese machinery makers like Yaskawa Electric Corp (T:6506), Fanuc Corp (T:6954) and Canon Inc (T:7751).
Most companies are only likely to firm up their capital expenditure plans for the next fiscal year at the start of 2019. That means the next BOJ tankan, due early April, will give a better picture on how the trade woes affect corporate spending appetite, analysts say.
"Big firms' capital spending came out strong reflecting the yen's weakening and falling oil prices. As such temporary factors fade away, however, corporate sentiment may turn for the worse given a slowdown in the world economy and the fear of a trade war," said Kuwahara of Nomura Securities.