Japanese firms saw conditions as slightly better in June than three months earlier and expect more improvement by September, a Bank of Japan (BoJ) survey found.
The central bank's tankan survey of business sentiment on Monday also showed firms plan to boost their capital spending in the business year ending next March, helping to set the stage for Japan's first interest rate rise in six years.
Upbeat results in the quarterly survey propelled the yen to a three-week high against the dollar and pushed up yields on Japanese government bonds. The benchmark Nikkei stock average rose about half a per cent.
The headline diffusion index for big manufacturers' sentiment was plus 21, higher than the reading of plus 20 in March but slightly below the market's median forecast of plus 22.
The tankan, or "short-term economic outlook" in Japanese, also showed big firms expect their capital spending to rise 11.6 per cent in the year ending next March, beating the market's consensus forecast for an 8.8 per cent gain.
Only two tipped an August rate rise, while four said the move may come in September. The other three didn't expect any rise in the current quarter. But some said the tankan results might not be enough to hasten a rate increase in July.
The government remained wary of the prospect of rising interest rates, which it fears could hamper the economic recovery.
"The BoJ needs to continue zero interest rates for the time being to support the economy," Chief Cabinet Secretary Shinzo Abe, the chief government spokesman, said today.
A rise in interest rates would also boost the cost of funding the massive state debt. Japan's outstanding public debt is expected to total about 774 trillion yen ($6.7 trillion) at the end of next March.