Japanese Business Sentiment Shows Steady Outlook

By Makiko Yamazaki and Leika Kihara

TOKYO (Reuters) – Japanese business sentiment was steady in the three months to September, according to a closely watched survey, indicating the economy remains on track for a moderate recovery. This allows for potential further interest rate hikes by the central bank.

Companies, however, remain cautious about the outlook, with service-sector firms predicting a downturn in business conditions over the next three months. The Bank of Japan’s “tankan” survey released on Tuesday noted that weak global growth and volatile financial markets are clouding the outlook.

The tankan survey will be a significant factor for the Bank of Japan (BOJ) as it sets monetary policy and releases new growth and inflation forecasts at its upcoming meeting on October 30-31.

The headline index for big manufacturers’ business confidence stood at +13 in September, unchanged from June and aligning with median market forecasts. The index for big non-manufacturers increased slightly to +34 from +33 in June, surpassing market predictions of +32 due to profit increases from price hikes in retail.

Takeshi Minami, chief economist at Norinchukin Research Institute, remarked that despite the yen’s recovery since mid-July, manufacturers’ sentiment remains surprisingly robust. He noted that the overall results were positive given various risk factors like a stronger yen and rising wage pressures.

Even with the yen’s 11% surge in the third quarter, big manufacturers raised their dollar/yen fiscal year estimation to 144.96, up from 142.68 in June. The current rate was at 143.725 yen.

Big companies anticipate a 10.6% increase in capital spending for the fiscal year ending March 2025, slightly lower than the median forecast of 11.9% and down from an 11.1% rise three months prior. Companies expect inflation to remain above the BOJ’s 2% target in the coming years, supporting the central bank’s viewpoint that Japan is progressing toward sustainable price goals, essential for further interest rate hikes.

Despite positive expectations from big manufacturers, non-manufacturers predict deterioration in conditions, which raises caution. Masato Koike, senior economist at Sompo Institute Plus, indicated that the momentum among non-manufacturers may have already diminished, especially in sectors like hospitality boosted by inbound tourism.

While a weak yen aided exports and retail through a surge in tourism, the recent yen recovery may hurt exports but alleviate rising costs for retailers and households.

The BOJ ended negative interest rates in March and raised its short-term rate to 0.25% in July, believing Japan is making steady advances toward its 2% inflation target.

BOJ Governor Kazuo Ueda has indicated that the central bank will continue rate hikes if businesses raise prices and wages due to optimistic outlooks to maintain inflation around the 2% target.

Toru Suehiro, chief economist at Daiwa Securities, stated that the latest tankan indicated that progress was being made. The current rate-hike cycle is likely to continue, with the focus shifting to how the yen’s rise influences business sentiment and inflation—key points for the next tankan report.

The following tankan is scheduled for December 13, just a week before the BOJ’s policy meeting on December 18-19.

Japan’s economy expanded at an annualized rate of 2.9% in the second quarter, benefiting from steady wage hikes that supported consumer spending. Capital expenditure is on the rise, though concerns about weak demand in China and slowing growth in the U.S. could cloud the export-dependent economy’s future.

The sentiment diffusion indexes from the tankan are calculated by subtracting the number of companies reporting poor conditions from those indicating good conditions. A positive reading indicates that optimists outnumber pessimists.