By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters – Japan’s big service-sector companies showed improved confidence in the last three months. A closely monitored survey by the central bank suggested that Japan was beginning to recover from the impact of the coronavirus epidemic.

However, big companies’ confidence in their ability to compete was low compared with three months prior. Companies also saw worsening business conditions ahead. This highlights the fragility of Japan’s economy recovery.

For policymakers trying to stabilize Japan’s fragile economic system, the outcome was mixed. They had to maintain a very loose monetary policy as well as a large spending package for pandemic-relief.

In the fourth quarter of 2021 the headline index measuring sentiment of big manufacturers was unchanged at 18 (as per the Bank of Japan’s tankan survey). The median forecast market for plus 19 was the basis of this index.

A survey that gauges big non-manufacturers sentiment showed a rise to plus 9 from plus 2. This was a result of the Sept. 30, lifting of State of Emergency curbs in order to combat the COVID-19 Pandemic. This was compared to market forecasts, which showed a reading of plus 6.

Large manufacturers as well as non-manufacturers anticipate that business conditions will worsen in the next three months. However, the survey was too short to include the effect of Omicron’s recent expansion.

Survey results were collected between Nov. 10 and Dec. 10, with the majority of responses arriving by Nov. 29. A BOJ official gave a briefing.

Also, the survey showed that big companies plan to raise capital spending by 9.3% for the year ending March 2022. This is less than what the market forecasts at 9.8%.

Japan’s performance has been slower than other countries after last year’s pandemic. The country shrank an annualized 3.6% between July-September, due to weak consumption.

Although analysts predict growth will bounce back during the last quarter of the year, others warn that Omicron could cloud the future and slow down recovery efforts next year.