The confidence of Japan's big manufacturers worsened in the three months to September, the central bank's Tankan survey found today.
This raised doubts that the government's "Abenomics" policies of fiscal and monetary stimulus can do much more to improve Japan Inc's cautious economic outlook.
The service-sector's mood, however, improved to more than a two-decade high and big firms maintained their bullish capital expenditure plans.
This offered some relief to policymakers worried at growing signs that Japan may slide into another recession.
While the mixed reading alone may not nudge the Bank of Japan into expanding stimulus immediately, it will keep the Bank of Japan under pressure to offer monetary support to keep overseas headwinds from curtailing corporate spending plans too severely, analysts say.
The headline index for big manufacturers' sentiment fell by 3 points to +12, marking the first deterioration in three quarters and roughly matching a median market forecast, the BOJ's quarterly business sentiment survey showed today.
Machinery makers were particularly hit hard by slumping demand for construction equipment and industrial robots in China, today's Tankan survey showed.
By contrast, big non-manufacturers' sentiment improved 2 points to +25, its highest level since 1991, as retailers enjoyed falling energy costs and a surge in shoppers from China at department stores across Japan.
Both big manufacturers and non-manufacturers expect conditions to worsen three months ahead, reflecting looming uncertainty over whether demand in emerging markets will pick up.
Still, big firms expect to increase capital spending by 10.9% in the fiscal year ending in March 2016, up from their plans three months ago and exceeding market forecasts.
The Tankan will be among key indicators for central bank policymakers to scrutinise when they meet for two rate reviews this month - one next week, and another on October 30 when the Bank of Japan publishes fresh long-term economic and price forecasts.
Japan's economy shrank in the three months from April to June and analysts expect growth to recover only modestly or even contract again in the third quarter, as exports and output slump due to weak demand in emerging Asian markets.
The Bank of Japan has stressed that it will look through the effect of lower oil prices and will not respond to temporary economic slumps, as long as companies keep increasing wages and capital expenditure.
But the patchy reading highlights the fragile nature of Japan's recovery, swayed heavily by the economic health of China and other emerging markets.
Companies of almost all sizes and sectors see conditions deteriorating three months ahead, including retailers now enjoying booming sales from surging inbound tourism, the survey found.