By Tetsushi Kajimoto and Izumi Nakagawa
TOKYO (Reuters) - Confidence among Japanese manufacturers edged up in March from three months ago and the service sector's mood hit a three-year high, the Reuters Tankan poll showed on Tuesday, signalling solid readings in the central bank's closely-watched quarterly tankan survey.
But the monthly poll, which tracks the Bank of Japan's (BOJ) tankan due out April 2, found manufacturers' and non-manufacturers' sentiment was likely to decline over the coming three months, adding uncertainty to the outlook.
Solid tankan readings should support the BOJ's optimistic economic view. But the central bank is in no mood to exit its easy money policy anytime soon, despite the economy's strong performance, with inflation still far below its 2 percent target.
Economists expect business sentiment to remain at high levels on the back of economic recovery at home and overseas. But risks such as protectionism stemming from U.S. trade policy, its impact on currencies, and a potential correction to the booming semiconductor market will weigh on the outlook.
In the Reuters poll of 542 large- and mid-sized companies, in which 261 firms responded on condition of anonymity, some manufacturers said they have had a boost from global demand for electronics, while others complained about the high cost of raw materials and rises in the yen that dented exporters' profits.
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"The yen's gains and declines in share prices may affect business with a lag, but so far they have not had much impact," a manager of an electrical appliance maker wrote in the survey on condition of anonymity.
"We are receiving solid inquiries about capital expenditure from our client manufacturers, with outstanding orders remaining elevated," the manager added.
The sentiment index for manufacturers stood at 28, down from the previous month's 29, according to the survey conducted March 1-15. Compared with three months ago, the index was up one point, suggesting slight improvement in the upcoming BOJ tankan.
The service-sector index rose to 35 from 33 in the previous month, driven by gains in retailers as well as information/communications firms. It was the best reading since June 2015.
The service-sector index was up one point versus three months ago, auguring well for the BOJ tankan.
The manufacturers' and service-sector indexes are expected to fall to 25 and 29 respectively in June.
The BOJ's last tankan in December showed big manufacturers' confidence improved for a fifth straight quarter to hit an 11-year high, signalling broadening economic recovery from solid external demand and hefty corporate profits.
The Reuters Tankan indexes are calculated by subtracting the percentage of pessimistic respondents from optimistic ones. A positive figure means optimists outnumber pessimists.
(Reporting by Tetsushi Kajimoto; Editing by Eric Meijer)