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Confidence among large Japanese manufacturers improved in the first quarter, a central bank survey showed Monday, as Tokyo works to reverse years of limp growth in the world's third-largest economy.
The results marked the first improvement in three quarters with companies expecting a pick-up in sales and profits. But they were cautious in their capital spending plans and the figures remained in negative territory, meaning a majority of surveyed firms are pessimistic about the future.
The economy "has come out of the worst period", said Takeshi Minami, economist at Norinchukin Research Institute.
"There is no doubt that the mood has improved thanks to the weaker yen."
But the uptick was not as strong as some observers had expected, and it comes days after official figures showed Japan's factory output slowed in February, highlighting the weak state of the economy and underscoring the size of the government's task in sparking sustained growth.
The Bank of Japan (BoJ) holds a policy meeting this week as its new governor, Haruhiko Kuroda, talks up his plans to stoke the economy and reverse years of falling prices which have crimped private spending and corporate investment.
His vow to beat deflation, a mantra led by his boss Prime Minister Shinzo Abe, has stoked speculation that the BoJ will launch a new wave of aggressive policy measures that tend to weaken the yen, helping the country's exporters.
The BoJ's latest Tankan survey showed sentiment at minus 8 for big firms between January and March from minus 12 three months earlier.
Those figures represent the percentage of firms saying business conditions are good minus those saying they are bad and are a key measure used by the BoJ in formulating monetary policy.
Japan's overall economic picture remains unsteady, although the nation squeaked out of recession in the last quarter of 2012.
The 0.2 percent expansion in GDP on an annualised basis in the quarter to December was welcome news for Abe, whose first few months in office have seen renewed optimism over the state of the economy which has suffered growth-sapping deflation for years.
Falling prices are bad for the economy because they encourage consumers to put off spending in the belief goods will be cheaper in the future, softening demand and hurting producers.
Markets have cheered Abe's policies, dubbed "Abenomics", sending the benchmark Nikkei 225 stock index soaring in the past four months, while speculation over monetary easing measures has helped push down the value of the yen.
Tokyo, however, has faced criticism it was engineering the unit's decline and risked setting off a global currency war in which rival nations work to devalue their currencies.
Manufacturers have been helped by the weakening in the yen, after the unit hit a record around the 75-level against the dollar in late 2011 and remained strong through most of last year.
The dollar bought 93.88 yen in morning forex trade on Monday.
A strong yen makes Japanese products less competitive overseas and shrinks the yen value of repatriated foreign income.
"If the yen stays at its current low level, (manufacturers) are bound to revise up their earning estimates sharply, leading to a further improvement of the economy," said Minami at Norinchukin Research Institute.
But "the yen will need to stay weak for a longer period in order to realise a stronger recovery in exports and firm growth in domestic demand".
In 2012, Japan's factory production weakened slightly after a decline in 2011 when industry was hammered by the quake-tsunami disaster and Fukushima nuclear crisis.