The service-sector mood, by contrast, recovered as easing border controls and an end to COVID-19 curbs heightened hopes for a rebound in tourism and consumption, the Bank of Japan's tankan survey showed.
Takeshi Minami, chief economist at Norinchukin Research Institute, expects external factors, such as the fallout from U.S. and European monetary tightening, to weigh on Japan's exports and business sentiment.
"Given the fragile nature of Japan's recovery, the BOJ is not in a situation where it can normalise monetary policy anytime soon," he said.
Big firms plan to raise capital expenditure by 3.2% in the fiscal year that began in April, less than market forecasts for a 4.9% gain, the tankan showed.
Reporting by Leika Kihara and Tetsushi Kajimoto; Editing by Sam HolmesOur Standards: The Thomson Reuters Trust Principles.