The central bank's "tankan" quarterly survey showed big manufacturers' sentiment recovering to pre-pandemic levels in the first quarter thanks to robust exports.
But the March survey, released on Thursday, also showed an increase compared with three months ago in the ratio of companies that felt input prices were rising.
The ratio of companies feeling that sale prices were rising was smaller than that for input prices, suggesting that many companies were struggling to transfer rising costs to consumers.
"Domestic demand remains weak," said Kenta Maruyama, an economist at Mitsubishi UFJ Research & Consulting. "If Japan takes longer to contain the pandemic, more firms could face financial trouble," he said.
The yen is already much weaker than levels that companies base their earnings forecasts on. The tankan showed companies expect the dollar to move around 106 yen on average during the fiscal year that began on Thursday, April 1, below current levels around 110 yen.
Some firms are moving ahead with price hikes. Nisshin OilliO Group raised prices for household cooking oil by more than 20 yen per kilogram from April, and plans to hike again in June.
Showa Sangyo also raised cooking oil prices twice this year, including in March, as the weaker yen led to rising raw material and transportation costs.
For restaurants, rising raw material costs could be a fatal blow as sales continue to suffer from government requests for them to close early to prevent the spread of the coronavirus.
A total of 715 restaurants went bankrupt in the year that ended in March, the third largest number on record, following 784 bankruptcies the previous year, according to think-tank Teikoku Databank.
(Reporting by Kentaro Sugiyama; Additional reporting and writing by Leika Kihara; Editing by Gareth Jones)
By Kentaro Sugiyama