Japan’s biggest manufacturers most optimistic since 2018

CONFIDENCE among Japan’s large manufacturers rose to the highest level in more than eight years, supporting the Bank of Japan’s case for continuing to raise interest rates.

The sentiment index climbed to 24 in September from 22, improving for a sixth straight quarter, the BOJ’s quarterly Tankan business survey showed on Thursday (Oct 1). Economists in a Bloomberg survey had forecast a rise in the gauge to 25. The survey is one of the bank’s most closely watched data sets.

The gauge for large non-manufacturers edged down to 35 from 37. A positive reading means more firms view conditions as “favourable” than “unfavourable”.

The latest Tankan points to continued resilience among Japanese companies.

Robust global AI demand is cushioning the fallout from the Middle East conflict, helping the manufacturing PMI gauge stay expansionary every month this year, while rising real wages are supporting demand for non-manufacturing services. Against that backdrop, Thursday’s survey is likely to reinforce market expectations that the BOJ will raise its benchmark rate again by December.

The BOJ also closely monitors corporate price expectations in the report. Those remained elevated but edged down a tad, with firms projecting an annual pace of inflation at 2.5 per cent five years ahead, compared with 2.6 per cent in the previous report. 

The survey coincided with a renewed rise in oil prices amid fresh concerns over the lack of progress in US-Iran negotiations. Iranian officials have privately expressed pessimism about reaching a deal to end hostilities and reopen the waterway before US midterm elections in November, according to people familiar with the matter.

The yen’s persistent weakness is also likely a key factor as it stays near the key threshold of 160 per dollar despite efforts by US and Japan authorities to turn the tide. Japan’s currency was trading around 157.70 against the dollar on Thursday morning in Tokyo.

On top of strong AI demand, Japanese businesses are benefiting from an economy in which sustained price and wage increases are becoming more entrenched, giving companies greater scope to raise prices after years of cost-cutting and stagnant wages.

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Corporate profits reached a record high in the second quarter, according to a report by the Finance Ministry last month.

A Teikoku Databank report on Wednesday showed that the number of food and beverage items subject to price increases reached 4,965 in September, more than doubling from a year ago. 

The latest Tankan report will provide a key input into the BOJ’s decision on whether to raise the policy rate at the end of this month, Kazuo Momma, former BOJ executive director in charge of monetary policy, told Bloomberg last week.

Momma sees as much as a 30 per cent chance of a hike when authorities set policy on Oct 30. REUTERS