Signs of a pickup in inflation expectations may offer some hope to the Bank of Japan that consumer prices will inch towards its 2 percent inflation target, but the decline in sentiment highlights the looming risks to the economic outlook.
The BOJ's quarterly survey on people's livelihood showed households' confidence about the economy stood at minus 14.3 in December, deteriorating from minus 13.3 in September.
The index subtracts the percentage of households who feel economic conditions have worsened from those who believe they have improved. A negative reading means more households feel economic conditions have deteriorated.
The survey showed the ratio of households who expect prices to rise a year from now stood at 77.5 percent in December, up from 76.0 percent in September.
Of the total number of households, 80.8 percent expect inflation to pick up five years from now, up slightly from 80.6 percent in September, the survey showed.
Japan's annual core consumer inflation slowed in November to 0.9 percent, which is distant from the BOJ's 2 percent inflation target and reinforces expectations that monetary policy will remain easy for an extended period.
The survey comes amid growing concern about Japan's economic outlook.
Japanese stocks tumbled at the end of last year, as part of a global selloff amid growing signs that the tit-for-tat trade tariffs between the United States and China are weighing on growth.
Japanese stocks have since recovered some of their losses, but there are concerns that the trade war and a rising yen could weigh on business activity and discourage companies from raising wages, which would be a blow to economic growth.
(Reporting by Stanley White; Editing by Simon Cameron-Moore)
