The BOJ tankan report, which followed a run of weak economic data, showed that big manufacturers were especially downbeat following a slowdown in exports, which have driven Japan's economic recovery over the past three years.

The survey's headline diffusion index (DI) for big manufacturers fell to plus 14 from plus 22 in December, falling well short of a consensus market forecast for a rise to plus 23.

"It's very bad, I was shocked," said Azusa Kato, economist at BNP Paribas in Tokyo. "We had thought that the inventory adjustment in the electronics sector was nearly finished but perhaps conditions are worse than we expected."

The yen weakened about a quarter of a percent against the dollar to about 107.50 after the data.

Tokyo share prices also initially fell on the weak reading but recouped losses as other data in the report reassured the market that a recovery would still take hold this year.

"It's likely that a fall in exports and production was reflected in the worsening DI for big manufacturers," said Takashi Miyazaki, strategist at UFJ Partners Asset Management.

"But the figure for non-manufacturers came inline with expectations, and this should underpin the (stock) market here."

The DI in the tankan -- Japanese short-hand for "short-term economic outlook survey of enterprises in Japan" -- is derived by subtracting the percentage of firms reporting unfavourable conditions from those reporting favourable conditions.

A positive number implies an expansion in business activity.

The government held to its view that a recovery was intact.

"The economy on the whole is in consolidation. The figures generally underscore a recovery trend," Economics Minister Heizo Takenaka told reporters.