Japan's mixed business sentiment highlights patchy economic outlook

(Corrects figures throughout)

By Tetsushi Kajimoto

TOKYO (Reuters) - Japanese manufacturers became more confident about business conditions in July whereas those in the service sector cooled, the monthly Reuters Tankan survey showed on Wednesday, reflecting a patchy economic outlook.

The poll of 506 large non-financial firms comes two weeks before the Bank of Japan (BOJ) holds its July 30-31 policy review. Investors are seeking clues on when the BOJ may raise interest rates, after doing so in March for the first time since 2007 and then deciding last month to reduce its bond-buying.

The central bank will scrutinise its own tankan - or short-term outlook - as well as other data for signs of a sustained rate of inflation and strong household consumption backed by wage hikes, which could strengthen the case for more rate hikes.

In the Reuters Tankan poll, which closely tracks the BOJ's tankan, the sentiment index for manufacturers stood at plus 11, up five points from June and its first gain in four months.

However, manufacturers expect the index to fall back to plus 10 over the next three months.

"Domestic price hikes have weakened consumption and a slowing Chinese economy has caused China-bound materials from the Middle East to make inroads into the Japanese market at low prices," a manager at a chemicals manufacturer wrote in the Reuters poll, conducted July 2-12, on condition of anonymity.

"The double punches of weak domestic demand and cheap import materials from overseas are curbing our sales volume."

A food processing company manager wrote: "Input prices have risen and remain elevated due to the weak yen as we struggle to transfer costs to our customers."

The Reuters Tankan service-sector index fell for the first time in three months, to plus 26 from plus 31 a month earlier. Non-manufacturers expect the index to be plus 27 in October.

The Reuters Tankan indexes are calculated by subtracting the percentage of pessimistic responses from optimistic ones. A positive figure indicates optimists outnumber pessimists.

(This story has been corrected to fix the figures throughout)

(Reporting by Tetsushi Kajimoto; Editing by Christopher Cushing)