Written by Makiko Yamazaki and Laika Kihara
TOKYO (Reuters) – Japanese business sentiment stabilized in the three months through September, a closely watched survey showed, a sign that the economy remains on track toward a moderate recovery that leaves room for the central bank to raise interest rates further.
But companies remained cautious about expectations, as service sector companies expect business conditions to deteriorate over the next three months, according to the Tankan survey conducted by the Bank of Japan, on Tuesday, as weak global growth and financial market volatility cast a shadow over expectations.
The reservoir will be among the key factors the Bank of Japan will scrutinize in setting monetary policy and issuing new growth and inflation forecasts at its next meeting on October 30-31.
The survey showed that the main index measuring the business confidence of major manufacturers reached +13 in September, unchanged from June, and in line with the average market expectations.
Tankan showed that the sentiment index for major non-manufacturers rose slightly to +34 from +33 in June, beating market expectations of +32, as higher prices boosted profits for retailers.
“Although the yen has rebounded since mid-July, sentiment among major manufacturers remains unexpectedly strong,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “The overall results are positive, taking into account various risk factors such as a stronger yen, pressure to raise wages and downside risks to the global economy.”
Despite the yen’s 11% rise in the third quarter, major manufacturers set their dollar/yen estimates for the current fiscal year at 144.96, up from 142.68 in the June survey. The dollar reached 143.725 yen on Tuesday.
Tankan showed that major companies expect capital spending to increase by 10.6% in the fiscal year to March 2025, lower than the average forecast for an increase of 11.9% and down from an increase of 11.1% three months ago.
Tankan showed that companies expect inflation to remain above the Bank of Japan’s 2% target one, three and five years ahead, supporting the central bank’s view that Japan is making progress towards permanently meeting its price target – a prerequisite for raising interest rates that remain low. . .
But the survey found that Japanese companies remain cautious about the outlook.
While major manufacturers expect conditions to improve three months before, non-manufacturers expect conditions to worsen, Al Khazzan showed.
“The momentum among non-manufacturers could have already faded, including hotels and restaurants boosted by domestic tourism,” said Masato Koike, chief economist at Sumbo Plus Institute.
The weak yen has given a boost to exports and retailers benefiting from increased domestic tourism. The recent rise in the yen’s value will hurt exports and inbound tourism, but ease the pain endured by retailers and households as a result of higher import costs.
The Bank of Japan ended negative interest rates in March and raised the short-term interest rate to 0.25% in July on the view that Japan is making steady progress toward achieving its 2% inflation target permanently.
Bank of Japan Governor Kazuo Ueda said the central bank will continue to raise interest rates if companies continue to raise prices and wages due to optimism about the outlook, and will help keep inflation permanently near its 2% target.
“For the Bank of Japan, today’s tankan was evidence that things are on the right track,” said Toru Suehiro, chief economist at Daiwa Securities. “The interest rate hike cycle is likely to continue.”
“The focus is shifting to how a stronger yen will impact business sentiment and inflation. This will be the key point to be scrutinized in the next report,” he said.
The next report is due on December 13, about a week before the Bank of Japan’s policy meeting on December 18-19.
Japan’s economy expanded at an annual rate of 2.9% in the second quarter as steady wage increases boosted consumer spending. Capital spending continues to grow, although weak demand in China and slowing growth in the United States cloud the outlook for the export-reliant nation.
Tankan sentiment diffusion indices are derived by subtracting the number of respondents who say conditions are bad from those who say they are good. A positive reading means that the number of optimists exceeds the number of pessimists.
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