Corporate confidence among Japanese executives has hit an 18-month high, the Bank of Japan's benchmark Tankan survey has said.

But, with the pace in the revival of business optimism slowing, the survey was seen by many observers as evidence that the recovery in the world's second largest economy was slowing.

The best of the recovery is over

Tomoko Fuji, Nikko Salomon Smith Barney

The Tankan's much-watched index of business sentiment at large manufacturers remained in negative territory in September if, at minus 18, four points higher than in June.

For large non-manufacturers, the index rose to minus 13 from minus 16.

"There are signs of recovery in the economy," said government spokesman Yasuo Fukada.

"But the environment is not necessarily favourable. In fact, it is getting tougher."

Market reaction

Finance Minister Masujuro Shiokawa said: "The pace of decline has slowed somewhat. That said, the recovery is lacking momentum."

Japan will undertake utmost efforts to resolve the bad debt problem

Heizo Takenaka, Economics Minister

Analysts concurred, with Tomoko Fuji, economist at Nikko Salomon Smith Barney, stating: "The best of the recovery is over."

The Nikkei share index slipped by 2.4% on Tuesday, against a backdrop of weak stock markets worldwide.

Reformer takes charge

The Tankan survey indicated that executives remained intent on cutting capital spending, and foresaw only marginal improvements in business conditions by December.

The data was seen by Economics Minister Heizo Takenaka, a key advocate of economic reforms, as evidence that risks remained despite signs of recovery.

Mr Takenaka, appointed bank regulator on Monday as the government sought to take a more radical stance in fostering recovery, also on Tuesday announced a taskforce to tackle banks' bad loans.

The loans, which amount to trillions of yen, are seen as a key hurdle to economic revival.

"Japan will undertake utmost efforts to resolve the bad debt problem," Mr Takenaka said.