Business confidence among Japanese manufacturers suffered its first drop in four months in October, dragged down by a sharp slump in the auto and transport machinery sector, according to the Reuters Tankan poll published on Wednesday.

The index, which tracks the Bank of Japan's quarterly business survey, dropped to plus 8 in October from plus 13 in September amid challenges including the US tariffs, rising costs for raw materials and labor, and weak overseas demand.

The auto and transport machinery sector, a major exporter and employer, suffered the most severe confidence collapse, with its index plummeting to plus 9 from plus 33.

The overall manufacturers' index is now forecast to decline further, slipping to plus 4 by January as companies reported that they are unable to pass all of these increasing costs on to their customers.

Further, the weakened demand from China has led to increased competition and softer sales.

This sagging overseas demand is expected to cause Japan's economy to contract in the July-September quarter.

In contrast, the mood among non-manufacturing firms held steady, supported by a strong retail sector.

A total of 237 responses from nearly 500 major manufacturers revealed that five of the nine manufacturing sectors-including machinery and precision equipment-saw declining confidence and cited tariff-related challenges.