TOKYO (AP) -- Japanese companies are feeling more confident about business for the second straight quarter. They just don't want to build new factories or hire more workers yet.
The Bank of Japan's closely watched "tankan" survey of business sentiment released Thursday showed the main index for large manufacturers at minus 33, lifted by an emerging recovery in global trade. Three months ago the index hit minus 48 after slumping to a record low of minus 58 in March.
The figure represents the percentage of companies saying business conditions are good minus those saying conditions are unfavorable. The result matches Kyodo news agency's average market forecast.
The less pessimistic mood is certainly a welcome development for the world's No. 2 economy as it emerges from its worst recession since World War II. But with an uncertain profit outlook, companies remain wary of investing in factories or workers -- a deep wrinkle that could undermine the country's nascent rebound.
Major manufacturers and non-manufacturers unexpectedly reduced their capital spending plans and now expect to cut expenditures by an average 10.8 percent this fiscal year through March 2010. Analysts had expected a slight uptick from a 9.4 percent reduction forecast in June's survey.
"It doesn't help so much that companies are becoming a bit more optimistic," said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. "What they need to see is that we really have original new domestic demand. And this is simply not happening."
Companies downgraded their annual revenue and profits forecasts, which may not fully reflect the yen's recent strength, analysts said. Companies in the survey assume that $1 will buy an average 94.5 yen for the year instead of the 89-90 yen levels hit this week.
Disappointed investors sent stocks sharply lower after the tankan's release. The benchmark Nikkei 225 index tumbled 1.5 percent to 9,977.81.
The tankan's main sentiment index for big non-manufacturers inched up to minus 24 from minus 29 in June.
Sentiment among medium-sized manufacturers stood at minus 40 from minus 55, while the reading for small manufacturers was up slightly to 52 from minus 57 in June.
Japan's heavy reliance on exports, which drove economic expansion for five years through 2007, backfired in the aftermath of last year's global financial crisis. Between the third quarter of 2008 and the first quarter of 2009, Japanese exports plunged by the steepest margin among the Organization for Economic Cooperation and Development's 30 member countries.
The downturn resulted in a steep recession, which Japan finally managed to shake off in the April-June quarter. Aggressive emergency spending by governments, particularly China, has helped boost export demand and factory output.
Government data this week showed that industrial output in August increased 1.8 percent from the previous month.
Persistent caution among companies, however, is hurting households and consumer spending, which accounts for more than half of the country's economy.
Japan's unemployment rate hit a record 5.7 percent in July and is expected to have worsened in August when results are released Friday. Retail sales dropped 1.8 percent from a year earlier in the 12th consecutive monthly decline, the government said in a separate report Thursday.
The Nikkei financial daily reported Thursday that major retailer Seven & i Holdings Co. is considering shuttering 30 Ito-Yokado Co. supermarkets nationwide in an effort to stem losses.
Concerns about deflation are also intensifying after prices in Japan tumbled at a record pace in August. Lower prices may seem like a good thing, but deflation can hamper growth by depressing company profits and causing consumers to postpone purchases, leading to production and wage cuts. It can also increase debt burdens.
The Bank of Japan surveyed a total of 10,235 companies between Aug. 26 and Sept. 30, of which 99 percent responded.
The tankan helps the central bank guide monetary policy, though board members are not expected to change the central bank's key interest rate, now at 0.25 percent, for the time being.