TOKYO Optimism among big Japanese manufacturers in the third quarter reached the highest level in four years due to improving earnings, adding to recent evidence suggesting the economy is strong enough to withstand the blow from an expected sales tax hike.
The confidence boost comes on the heels of a series of data pointing to the world's third-largest economy steadily picking up momentum, as Prime Minister Shinzo Abe's "abenomics" cocktail of aggressive fiscal and monetary stimulus takes hold.
Wednesday's data also bodes well for the Bank of Japan's tankan corporate sentiment survey, due on October 1.
Improving sentiment, as well as data showing a rise in capital expenditure and a surge in sales of residential property suggest Abe can raise taxes without much harm to the economy.
"Earnings are improving for companies and this is supporting sentiment," said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
"The BOJ's tankan should also show things are improving. "
The business survey index (BSI) of sentiment at large manufacturers stood at plus 15.2 in July-September, compared with plus 5.0 in April-June, according to the joint survey by the Ministry of Finance and the Economic and Social Research Institute, an arm of the Cabinet Office.
That marked the highest level since plus 15.5 in July-September 2009, the data showed, another sign that the government's policies to end 15 years of grinding deflation and revive growth are gaining traction.
The BSI measures the percentage of firms that expect the business environment to improve from the previous quarter minus the percentage that expect it to worsen.
Optimism among large manufacturers' sentiment index is expected to worsen slightly to plus 13.5 in October-December, the survey showed. The previous survey had projected the October-December index at plus 15.8.
The previous BOJ tankan, released in July, showed that sentiment among big manufacturers was plus 4, turning positive for the first time in nearly two years.
The improvement in business sentiment follows data showing Japan's economy grew at a much faster pace than initially expected in the second quarter, comfortably outstripping its peers in the developed world.
Buoyed by the evidence of a briskly recovering economy and a successful trip to secure the rights to host the 2020 Olympic Games, Abe wasted no time in preparing the groundwork for an increase in the national sales tax in April.
On Tuesday, Abe ordered his government to craft measures to bolster the economy to cushion the impact of the tax hike.
Major political parties agreed last year to raise the 5 percent sales tax to 8 percent next April and to 10 percent in 2015 to pay for rising welfare spending, provided that the economy is strong enough to withstand the hikes.
Abe will decide on the tax measures by October 1. The prime minister has previously said he wanted to examine the BOJ tankan, which is released on the same day.
However, Abe's request for a stimulus package suggests he has already decided to formally approve the tax increase.
Japan emerged from recession in 2012 and data for much of this year has shown the benefits of Abe's reflationary policies and the BOJ's aggressive monetary stimulus.
(Editing by Shri Navaratnam)