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By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) - Japanese manufacturers' sentiment turned positive in the three months to June for the first time in nearly two years, a closely-watched central bank survey showed, a sign the recent market turbulence has yet to hurt the feel-good mood created by the government's reflationary policies.
Service-sector sentiment also improved and more companies see room to raise prices due to robust private consumption, the "tankan" survey showed, boding well for the Bank of Japan's plan to end 15 years of grinding deflation and achieve its 2 percent inflation target through aggressive monetary stimulus.
The central bank will consider revising up its assessment of the economy at its rate review next week, reflecting the upbeat survey results that included plans for a healthy increase in corporate capital expenditure, sources familiar with the BOJ's thinking said. Last month, the central bank said the economy was "picking up".
A brighter view of the economic outlook would heighten the chance the BOJ will hold off on additional monetary easing in coming months.
"The improvement in big firms' sentiment was largely driven by yen weakness, which supported exports, and the recovering economy overall," said Taro Saito, senior economist at NLI Research Institute in Tokyo. "The BOJ probably doesn't need to act immediately."
The headline index for big manufacturers' sentiment improved 12 points from three months ago to plus 4, slightly better than a median market forecast of plus 3 and the highest level since March 2011, the quarterly tankan survey showed on Monday.
That was the second straight quarter of improvement and the first positive reading - which means optimists outnumbered pessimists - since the survey of September 2011, a vindication of Prime Minister Shinzo Abe's "Abenomics" policy of aggressive monetary stimulus and fiscal spending.
Service-sector sentiment also brightened with the index for big non-manufacturing companies rising 6 points to plus 12, a tad higher than a median market forecast of plus 11.
Big manufacturers expect business conditions to improve further three months ahead, suggesting they see the negative effect of the recent market turbulence on the economy as limited - at least for now.
CAPEX PLAN UPBEAT
The survey was compiled amid acute volatility that drove up bond yields and erase a chunk of the gains in Tokyo shares made on investors' big hopes for Abe's stimulus plans. But sentiment improved across sectors and even among small firms, a sign the benefits of "Abenomics" was broadening.
Big firms intend to increase capital expenditure by 5.5 percent in the current business year from April, more than a median market forecast of a 2.9 percent increase. This suggests that the positive mood is finally prompting companies - long hesitant to spend due to the murky economic outlook - to expand operations.
That is an encouraging sign for the BOJ, which has been focusing on capital spending figures to gauge whether the psychological impact of its reflationary policy will translate into real demand.
The yen's drop against the dollar played a large part in brightening sentiment among automakers and electronic giants. Big manufacturers now expect the dollar to average 91.20 yen in the current business year, much higher than the 85.22 yen projected three months ago.
The new projection is still lower than current dollar/yen levels of around 99 yen, suggesting that exporters will enjoy further gains in profits if exchange-rates stay not far from recent levels.
In another positive sign, robust private consumption is making companies feel more comfortable about raising the price of their goods, mostly to pass on the rising costs of imports from the weak yen.
An index measuring how companies see price moves in the future turned positive for big non-manufacturers, meaning more of them expect the price of their goods to rise rather than fall three months ahead, the tankan showed.
"If you ask whether Abenomics boosted business sentiment, I would say all in all, yes," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute in Tokyo.
"If companies can start passing on the rising costs (to consumers), the improvement in business sentiment will spread from big firms to smaller firms," he said.
Financial markets have rallied strongly since Abe first highlighted his brand of aggressive policymaking late last year. They got a further boost in April, when the BOJ unleashed an intense burst of stimulus by pledging to double the supply of money in two years.
But the positive market sentiment turned around in late May when the BOJ's huge asset purchases disrupted the bond market and drove up yields which, coupled with expectations of the U.S. Federal Reserve's tapering of monetary stimulus, hit global stocks and triggered a rebound in the safe-haven yen.
Since the middle of last week, global markets have stabilized somewhat. The upbeat tankan results helped push up Tokyo's Nikkei stock average by 1.3 percent on Monday to a one-month high. <.N225>
The tankan's sentiment indexes are derived by subtracting the percentage of respondents who say conditions are poor from those who say they are good. Nearly 70 percent of the companies that replied did so by June 11, the central bank said.
(Additional reporting by Kaori Kaneko; Editing by Eric Meijer and Richard Borsuk)