Japan's business sentiment soured in January-March to hit the worst level in more than two years, a closely-watched central bank survey showed on Monday, as slowing global growth clouds the outlook for the export-reliant economy.

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The service-sector mood, by contrast, recovered as easing border controls and an end to COVID-19 curbs heightened hopes for a rebound in tourism and consumption, the Bank of Japan's Tankan survey showed.

The survey will be among key data the central bank will scrutinise in producing fresh quarterly growth and inflation estimates at its next meeting on April 27-28, the first one to be chaired by incoming Governor Kazuo Ueda.

The headline index measuring big manufacturers' sentiment fell to plus 1 in March from plus 7 in December, Bank of Japan (BOJ) data showed, worse than a median market forecast for a reading of plus 3. It was the fifth straight quarter of deterioration and the worst level hit since December 2020.

Sentiment soured for a broad sector of manufacturers with many firms complaining of the impact of rising raw material and fuel costs, as well as slowing overseas growth and slumping chip demand, a BOJ official told a briefing.

Big non-manufacturers' index rose for a fourth quarter to plus 20 from plus 19 in December, matching a median market forecast, the survey showed, as hopes of a rebound in tourism and service demand brightened morale among retailers and hotels.

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Takeshi Minami, chief economist at Norinchukin Research Institute, expects external factors, such as the fallout from US and European monetary tightening, to weigh on Japan's exports and business sentiment.

"Given the fragile nature of Japan's recovery, the BOJ is not in a situation where it can normalise monetary policy anytime soon," he said.

Big firms plan to raise capital expenditure by 3.2 percent in the fiscal year that began in April, less than market forecasts for a 4.9 percent gain, the tankan showed.

Companies expect inflation to hit 2.8 percent a year from now, 2.3 percent three years from now and 2.1 percent five years from now, the survey showed in a sign firms are bracing for inflation to remain above the central bank's 2 percent target for years to come.

Japan's economy narrowly averted a recession in the final three months of 2022 and analysts expect any rebound in the January-March quarter to have been modest, as slow wage growth and rising living costs hurt consumption.

Many big firms promised hefty pay rises in spring wage talks with unions, offering policymakers hope that consumption will recover and take up the slack from an expected slump in exports.

The strength of the economy, as well as wage and inflation outlook, will be key to how soon the BOJ could tweak or end its bond yield control policy that has been criticised as distorting market pricing and hurting financial institutions' margin.

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