Japan business confidence hits 3-year high

Confidence among Japan's biggest manufacturers has risen for the third straight quarter to the best level in more than three years, a key central bank survey showed Monday as exports continue to grow.

The Bank of Japan's Tankan report -- a quarterly survey of more than 10,000 companies -- showed a reading of 17 among major manufacturers, the highest since the first quarter of 2014.

The key index, which rose from 12 in the previous survey, also beat market expectations of a result around 15.

The better-than-expected Tankan would normally be good news for Prime Minister Shinzo Abe, who has been trying to revitalise Japan's economy.

But the results came a day after his Liberal Democratic Party suffered a crushing defeat in elections for the Tokyo municipal assembly.

The vote was seen as a barometer of current public sentiment toward his government which has been beset by a series of scandals that have dented its support.

Abe swept to power in late 2012 on a pledge to cement a lasting recovery in the world's third-largest economy with a growth plan eponymously dubbed Abenomics.

The scheme -- a mix of aggressive monetary easing and huge government spending along with reforms to the economy -- stoked a stock market rally as it weakened the yen and fattened corporate profits, but the effect on the wider economy has been less dramatic.

Recently the country's prospects have been improving on the back of strong exports, with investments linked to the Tokyo 2020 Olympics also giving the economy a shot in the arm.

"The jump in the Tankan's headline index for large manufacturers suggests that economic activity accelerated last quarter," said Marcel Thieliant, senior Japan economist at Capital Economics.

"Capacity shortages have intensified and manufacturers are reporting the smallest declines in output prices since 2008," he wrote in a commentary.

The latest survey also showed the average currency exchange rate expected by large manufacturers came in at 108.31 yen to the dollar for the year to March 2018, much stronger than current market rates.

As the actual rate is currently around 112 yen, "there appears to be room for sentiment to improve further, especially in manufacturing, in the September survey," economists Yuichiro Nagai and Yukito Funakubo of Barclays said in a research note.

A weaker currency is positive for Japanese exporters as it makes their products more competitive abroad and inflates repatriated profits. 

The Tankan, closely watched for being the broadest indicator of how Japan Inc is faring, marks the difference between the percentage of firms that are upbeat and those that see conditions as unfavourable.

The latest report comes after a batch of government data on Friday showed inflation ticked up in May, but weak spending underlined the challenges still facing Tokyo's battle to ramp up prices and slay years of on-off deflation.

The index for non-manufacturers rose to 23 from 20 in the previous Tankan, reaching the highest level since the final quarter of 2015.