The quarterly "tankan" survey's sentiment index for large manufacturers fell from 23 in September to 19, below the 21 mark predicted by analysts. A similar index for large non-manufacturers in the survey, which polls more than 10,000 companies nationwide, fell from 20 to 16. Both figures were the lowest since September 2005.

The indices measure the percentage of companies reporting positive business conditions minus those who are negative. A decline means a growing portion of companies are pessimistic.

Economy Minister Hiroko Ota said a stronger yen, which erodes exporters' overseas income, and rising oil prices weighed on business confidence. But she said the results did not change her view that Japan's economy is on an upward trend.

"The worsening of the BOJ tankan reflects the recent rise in oil, commodities prices and a stronger yen," Ota told a news conference. "These factors must be kept in mind in judging the overall economic trend."

A possible slowdown in the U.S. economy — a key export market — was risk that she was monitoring, she said.