By Daniel Leussink
TOKYO - Japanese manufacturers' business confidence dropped to a more than 2-1/2-year low in June, a Reuters poll showed on Tuesday, re-igniting fears the economy could be hit by slowing external demand in the face of a global slowdown and trade risks.
The monthly poll, which tracks the Bank of Japan's (BOJ) tankan quarterly survey, found the service-sector mood slipping for the first time in four months, suggesting business confidence has fallen ahead of a planned nationwide sales tax increase in October.
Both manufacturers' and non-manufacturers' sentiment are expected to remain below last month's levels over the coming three months, boding ill for the central bank's closely-watched tankan survey due next in July.
Subdued business confidence - on top of weakness in exports and household spending - has clouded the outlook for the world's third-largest economy, though analysts widely expect the BOJ to keep policy steady at this week's rate review.
In a Reuters poll of 505 large- and mid-sized companies, in which 263 firms responded on condition of anonymity, exporters voiced concerns about China's economic slowdown and its trade war with the United States.
"Our clients are making cautious decisions in capital spending, as the international situation is unstable because of U.S.-China trade tensions and the UK's departure from the EU," a manager of a machinery maker wrote in the survey.
The Reuters Tankan sentiment index for manufacturers stood at 6 in June, down six points from May, weighed down by electricity, transport equipment machinery and steel companies, the June 4-13 survey showed.
The index hit the lowest reading since September 2016, falling for the first time in two months.
It is expected to rebound to 11 in September.
In the first quarter, Japan's economy managed a second straight quarter of growth after a third-quarter contraction, thanks to stronger capital spending, but analysts expect global trade tensions to remain a drag on growth.
The service-sector index dropped five points to 22 in June from 27 in the previous month, weighed by retailers, potentially setting off alarm bells for consumption, which makes up about 60% of the economy.
The index is seen falling further to 21 in September.
Fragile domestic demand could be a source of concern for policymakers who are taking steps to ensure the planned sales tax increase to 10% from the current 8% will go ahead in October, as the 2014 tax hike depressed consumer sentiment.
The BOJ's last quarterly tankan showed the business mood hit a two-year low in the March quarter, underlining the impact rising trade tensions and weakening overseas demand were having on Japan's export-reliant economy.
The Reuters Tankan indexes are calculated by subtracting the percentage of pessimistic respondents from optimistic ones. A positive figure means optimists outnumber pessimists.
(Editing by Jacqueline Wong)