Big manufacturers39; sentiment index at 13 vs 11 in March
Servicesector index at 33 vs 34 in March
Corporate inflation expectations rise slightly
Sharp downgrade to Q1 GDP seen affecting BOJ39;s forecasts

TOKYO, July 1 Reuters Japan downgraded firstquarter gross domestic product GDP on Monday and the servicesector business mood soured in June on concerns over rising costs, offseting a lift in factory confidence and pointing to weakness in consumption.

But the tankan quarterly survey showed firms planned to ramp up capital expenditure and projected inflation to stay around the Bank of Japan39;s target of 2 in coming years, keeping alive market expectations of a nearterm interest rate hike.

The findings, which come ahead of the BOJ39;s next policy meeting on July 30 and 31, complicate its decision on how soon to raise interest rates, analysts say.

The improvement in business sentiment may have peaked, particularly for nonmanufacturers. This data doesn39;t necessarily help the BOJ make the case for an early rate hike, said Toru Suehiro, chief economist at Daiwa Securities.

But corporate inflation expectations heightened slightly, which will likely keep alive market expectations for a nearterm rate hike.

A rare unscheduled downgrade to Japan39;s historical gross domestic product GDP data showed the economy shrank more than reported in the first quarter, which will probably force the BOJ to cut its growth forecasts this month.

Separately, the BOJ39;s tankan showed…