In another worrisome sign, sentiment in the service sector improved this month but is forecast to tumble three months ahead.
The Reuters Tankan aligned with the Bank of Japan's closely watched quarterly tankan business survey out earlier this month, which showed big manufacturers' business confidence fell to a nearly three-year low in the quarter to June.
Both the Reuters and BOJ surveys underscore expectations among some analysts of a possible ramping up of the central bank's stimulus at its policy review later in the month.
BOJ officials have said they remain ready to ease further if economic conditions worsen, joining the U.S. Federal Reserve in signalling additional monetary stimulus amid deteriorating global conditions.
U.S. President Donald Trump and Chinese President Xi Jinping last month agreed to another truce in the year-long trade row between the world's two largest economies, but no deadline has been set for the negotiations to conclude.
Adding to the intensifying global trade friction, Japan is in a deepening row with South Korea after Tokyo curbed exports of some materials used to make high-tech equipment.
"Uncertainty is high on the outlook due to friction between the United States and China and rows between Japan and South Korea," a chemicals maker manager wrote in the survey taken July 1-12.
In the Reuters poll of 504 large- and mid-sized companies, the sentiment index for Japanese manufacturers worsened to 3 in July from 6 in June, dragged down by industries such as textiles/paper, steel/nonferrous metals and precision machinery.
It was the lowest reading since August 2016, posting a second straight month of declines. The outlook wasn't much to write home about either, with the poll predicting the index to inch up to 4 over the coming three months.
The service-sector index grew to 25 in July from 22 in the previous month, led by real estate/construction and wholesalers.
However, the index is seen falling to 16 in October, dragged down by retailers in a worrying sign for private consumption which accounts for roughly 60% of the world's third largest economy.
Given the broadening pressures on the economy, investors are watching out for any plans by Japan to postpone a scheduled sales tax hike to 10% in October. The last tax rise to 8% from 5% dealt a blow to consumers and triggered a deep economic slump.
Prime Minister Shinzo Abe has delayed a planned tax hike twice since then, but he has repeatedly pledged to go ahead this time, barring a big economic shock on the scale of the collapse of Lehman Brothers more than a decade ago.
"As the sales tax hike draws near, the retail sector is slowing. We cannot expect the kind of front-loading spending to boost consumption ahead of the tax increase," a retailer wrote.
The Reuters Tankan indexes are calculated by subtracting the percentage of pessimistic respondents from optimistic ones. A positive figure means optimists outnumber pessimists. - Reuters
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