By Tetsushi Kajimoto
TOKYO (Reuters) - Confidence among Japanese manufacturers dropped for a third straight month in January to a two-year low, a Reuters monthly poll showed, as worries over the health of the global economy and trade tensions take a toll on the corporate sector.
The monthly poll, which tracks the Bank of Japan's (BOJ) closely watched tankan quarterly survey, found service-sector sentiment held steady, suggesting that domestic demand may help offset rising headwinds from abroad.
But sentiment at both manufacturers and the service sector was seen deteriorating further in the coming three months, boding ill for the central bank's tankan survey due next on April 1.
The monthly poll results come as the central bank is set to debate downside risks to the economy and the price outlook. Weakening inflation and slowing external demand mean the BOJ is in no position to normalize monetary policy, while some investors are speculating further easing down the road.
In the Reuters poll of 480 large- and mid-sized companies, in which 480 firms responded on condition of anonymity, exporters complained about lack of demand in China and the United States and voiced concerns about the trade war between Japan's two major trading partners.
"Global demand is becoming markedly sluggish," a manager at a transport equipment maker wrote in the survey. "The United States has not been performing well since the start of this fiscal year, but other countries like China, India and Mexico are slowing down as well in the latter half."
The sentiment index for manufacturers stood at 18, down five points from the previous month, dragged down by declines in sectors such as steel and automobiles, according to the survey conducted Jan. 7-16.
The index is expected to fall further to 17 in April.
Underpinned by retailers, the service-sector index held steady at 31 in January reflecting firmness in private consumption, which accounts for about 60 percent of the economy.
The service-sector index was seen slipping to 27 in April.
The BOJ's tankan last month showed business confidence held steady from three months ago, but companies expect conditions to worsen three months ahead, a sign that the Sino-U.S. trade war and slowing global demand could chill corporate activity.
Japan's economy shrank an annualized 2.5 percent in the third quarter, suffering its worst slump in more than four years, as a string of natural disasters cooled consumer sentiment and disrupted factory output.
Many analysts expect growth to have rebounded in the current quarter, but global trade friction and a slowdown in China have raised risks to Japan's export-driven economy.
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 and Izumi Nakagawa; Editing by Jacqueline Wong)