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By Leika Kihara and Kaori Kaneko
TOKYO (Reuters) - Japanese business sentiment improved at the fastest pace in nearly two decades in October-December, a key central bank survey showed, a welcome sign for the economy as it emerges from the initial hit of the coronavirus pandemic.
But companies slashed their capital expenditure plans for the year ending in March 2021, as a recent resurgence of infections reinforces expectations any recovery in the world's third-largest economy will be fragile.
"A stronger-than-expected rebound in factory output mid-year and a recovery in overseas economies, notably China, helped improve manufacturers' sentiment," said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute.
"But companies likely won't raise capital expenditure much next fiscal year given the renewed rise in COVID-19 cases."
The headline index for big manufacturers' sentiment improved to minus 10 in December from minus 27 in September, the Bank of Japan's "tankan" survey showed on Monday, marking the second straight quarter when companies were less pessimistic about business conditions.
It was a better reading than the minus 15 projected in a Reuters poll and the fastest pace of improvement since 2002, as Japanese car and auto parts makers benefitted from a global rebound in automobile demand, the survey showed.
Big non-manufacturers' sentiment also recovered to minus 5 from minus 12 in September, roughly matching a Reuters poll of minus 6 and improving at the fastest pace since 2010.
A government campaign offering discounts for domestic travel helped lift sentiment among industries ranging from hotels, restaurants and retailers, a BOJ official told a briefing.
But big firms plan to cut capital expenditure by 1.2% in the current business year to March 2021, bigger than market forecasts for a 0.2% drop, the survey showed.
This was a downgrade from September when they planned to raise expenditure by 1.4%, a sign that slumping profits and the pandemic's resurgence are making firms wary of boosting spending.
While Japan avoided the high case numbers seen elsewhere when the coronavirus first hit, infections have risen as winter sets in, hitting a daily record on Saturday.
Companies also plan to slash new graduate hiring by 6.1% in the year beginning in April, the survey showed, which would be the most cautious hiring plan since the collapse of Lehman Brothers shook the global economy in 2010.
"Uncertainty over the outlook is weighing on companies' sentiment," said Yusuke Shimoda, senior economist at Japan Research Institute. "Unless people feel safe about going out, it would be difficult for government stimulus measures to yield results."