By Tetsushi Kajimoto and Izumi Nakagawa
TOKYO (Reuters) - Japanese manufacturers' confidence slumped the most in a year in September to an eight-month low and is forecast to worsen further as fears of a China-led global economic slowdown grow, a Reuters poll showed.
Domestic demand also looks increasingly fragile as service companies reporting the weakest sentiment since March and predicted further deterioration in the coming three months.
The Reuters Tankan - which closely tracks the Bank of Japan's quarterly tankan survey due on Oct. 1 - gave the latest glimpse of corporate morale after China's stock market rout last month.
The loss of confidence added to a recent run of soft indicators, keeping policymakers under pressure to offer fresh stimulus to rev up growth in the world's third largest economy.
"The BOJ tankan will probably show worsening of sentiment at manufacturers and service-sector firms," said Hiroshi Shiraishi, senior economist at BNP Paribas (PARIS:BNPP) Securities.
"The key is capital spending plans in the BOJ tankan. If capital expenditures falter, that could ruin the BOJ's scenario, possibly forcing it into further easing in October."
The monthly poll of 516 big and midsize companies between Aug. 31 and Sept. 11, of which 266 responded, cast doubt about the BOJ's economic optimism just as the central bank wraps up a policy review on Tuesday. BOJ policymakers are in no mood to expand monetary stimulus this week, sources say.
"China's slowdown is affecting our business," an executive at a transport equipment maker said in the survey, which companies answer anonymously. A chemicals producer said, "Business conditions are on track, but we cannot describe the situation as good because of concerns about China's slowdown."
Boding ill for private consumption, which accounts for about 60 percent of the economy, the survey showed retailers are struggling to lure customers.
"The number of shoppers has slightly declined on the existing-store basis. We need to cut down on costs as personnel expenses rise," said one retailer. Another said: "Sales are better than last year but they have not returned to levels seen before the sales tax hike" of April 2014.
The Reuters Tankan sentiment index for manufacturers fell to 9 in September from 17 in August, matching January's low and sliding the most since a year ago when the economy was in a recession caused by that tax hike.
The index is seen worsening further to 7 in December.