By Tetsushi Kajimoto and Izumi Nakagawa
TOKYO (Reuters) - Confidence at Japanese manufacturers rose in August to its highest level in a decade led by producers of industrial materials, a Reuters poll showed, in a further sign of broadening economic recovery. The Reuters' monthly poll - which tracks the Bank of Japan's closely watched quarterly tankan - found the service-sector mood fell but still remained at a relatively high level, underscoring the firmness in domestic demand which drove robust expansion in the second quarter.
Business sentiment was likely to sag slightly over the next three months, indicating a potential pullback from the hefty 4 percent annualised growth in the April-June quarter driven by private consumption and capital expenditure.
The sentiment index for manufacturers rose one point to 27 in August in the poll of 548 large- and mid-sized companies, conducted Aug. 1-16, in which 265 firms responded.
It was the best reading since August 2007, just before the last global financial crisis, led by producers of industrial materials such as oil, steel and chemicals, as well as manufacturers of metals, machinery and transport equipment.
"Our business is led by overseas markets. The domestic market is not so bad, China is recovering and America and Europe are performing well. Overall the sentiment is positive," Keisuke Fujii, a spokesman for Fanuc Corp, a manufacturer of robotics and automation equipment, told Reuters.
The company expects current profits to rise 6.1 percent this financial year and sales to increase 13.9 percent, due to demand for IT-related products in China and Taiwan, and industrial robots in the United States, Europe and China, he said.
BAD WEATHER, WARINESS ON OUTLOOK
Reflecting some wariness on the outlook, however, the manufacturers' index was seen slipping to 26 in November, with the yen strengthening amid concerns over developments surrounding North Korea's missile and nuclear programmes.
"Given the ongoing strength of overseas demand, we believe sentiment will remain firm going forward," said Yuichiro Nagai, economist at Barclays (LON:BARC) Securities.
"That said, the Japanese yen is appreciating and share prices are falling amid geopolitical risk. This trend, if it accelerates, could sharply undermine business sentiment."
The Reuters Tankan service-sector index slipped to 29 in August from the previous month's two-year high of 33, dragged down by sectors such as retailing, where confidence fell for a third straight month.
The service-sector index was expected to drop further to 25 in November.
Cool and rainy weather may dampen consumer spending in August, which would be worrying as private consumption constitutes about 60 percent of the economy and was a primary driver of the second-quarter's robust expansion.
Still, the retailers' sentiment index is expected to bounce in November, underlining a pick-up in consumption with a change in the weather, and the tightening labour market keeping household incomes firm.
The Reuters Tankan indexes are calculated by subtracting the percentage of pessimistic respondents from optimistic ones. A positive figure means optimists outnumber pessimists.
The BOJ's last tankan out July 3 showed big manufacturers' business confidence hit its highest level in more than three years in the June quarter.