Retailers are feeling better, not just exporters

The Tankan survey revealed improved optimism in all major sectors of the Japanese economy.

Business confidence among big manufacturers was at its strongest level since June 1997.

The turnaround in the service sector was even more dramatic, showing the best mood since May 1992.

Japanese businesses have been nervous about the yen's strength against the weakened dollar, but the Tankan survey suggests such fears are receding.

Domestic growth

Japan's service sector has languished in the doldrums for years as consumers have stubbornly ignored government efforts to persuade people to spend more money to boost Japan's listless economy.

But the Tankan sub-index for big service sector firms came in at a confidence reading of +5 for the first three months of 2004, compared with zero last time.

Service sector readings have been negative for the last four years.

For big manufacturers, the index rose to +12 from +7. The sector includes many globally significant exporters, particularly in consumer electronics firms and car makers.

Caution

The upbeat outlook has also spread to small firms, the Tankan found.

It is the latest sign of a pick-up in the Japanese economy, where gross domestic product (GDP) grew at its best rate for 13 years in the final quarter of 2003.

"The improvement in confidence at small firms is very encouraging because it suggests this is no longer simply an export-driven recovery, but that the benefits of export growth are filtering through to the domestic economy," Richard Jerram, chief economist at ING Bank in Tokyo told the BBC's World Business Report.

However, he warned that it was still too early to draw a line under Japan's economic troubles.

"I think it's premature to say that Japan doesn't need to worry about what happens in the rest of the world," he said.