TOKYO -- A quarterly survey by the Bank of Japan released Monday showed business sentiment rising to its strongest level in a decade, exceeding analysts' expectations for the world's third largest economy.
The BOJ's "tankan" index for large manufacturers rose to 22 from 17 in June and a forecast level of 15. It suggested that growing shortages of factory capacity could encourage manufacturers to invest more, helping to drive growth.
"Capacity and staff shortages are the most pronounced since the early 1990s and the survey suggests that price pressures are strengthening," Marcel Thieliant of Capital Economics said in a commentary.
The report comes as Prime Minister Shinzo Abe is seeking a fresh mandate for his nearly five-year-old administration. Last week, Abe dissolved parliament, paving the way for a snap election on Oct. 22, saying he wanted to gain public support for tough diplomatic and defense policies in light of escalating threats from Pyongyang.
The election's focus is not aimed mainly at Abe's economic policies, which have seen mixed success. But a new party launched by Tokyo's governor, Yuriko Koike, is posing a fresh challenge at a time when Abe's support ratings have sagged. Surveys show many Japanese dissatisfied with all the major political parties, as wages lag and growth remains tepid.
Last month, Japan downgraded its economic growth estimate for April-June to an annualized rate of 2.5 percent, from the 4.0 percent reported earlier.
The Bank of Japan's survey of 10,687 companies showed sentiment among non-manufacturers and smaller companies holding steady.
However, longer term forecasts were less upbeat. Even among the more bullish larger manufacturers, more than two-thirds of respondents said they viewed conditions as "not so favorable," with less than 30 percent responding they were "favorable."
Another survey issued on Monday, the Nikkei purchasing managers' index, showed factory output and new orders accelerating. Hiring also expanded, but at a slower pace, as did prices for manufacturing inputs.
The survey rose to a four-month high of 52.9 on a 0-100 scale where readings above 50 signify expansion.
Stronger demand from China and other markets has helped drive the recovery. An official survey released Saturday said that China's factory activity expanded in September at the fastest pace in five years, as the country's vital manufacturing sector stepped up production to meet strong demand.
The report by the Federation of Logistics & Purchasing said production, new export orders and overall new orders grew at a faster pace for the month.