Japanese Business Sentiment Steady in Q3 2023
By Makiko Yamazaki and Leika Kihara
TOKYO (Reuters) – Japanese business sentiment remained stable in the three months leading up to September, according to a closely watched survey, indicating that the economy is on a moderate recovery path, allowing for potential interest rate hikes by the central bank.
However, companies expressed caution about future conditions, particularly in the service sector, which anticipates a downturn in the next three months. This sentiment was reflected in the Bank of Japan's (BOJ) "tankan" survey released on Tuesday. Weak global growth and fluctuating financial markets contribute to this uncertainty.
The tankan survey will be a significant factor for the BOJ when determining monetary policy and when releasing updated growth and inflation forecasts at its upcoming meeting on October 30-31.
The headline index measuring sentiment among large manufacturers was +13 in September, unchanged from June and aligning with median market expectations. Conversely, the sentiment index for large non-manufacturers increased slightly from +33 to +34, surpassing the forecast of +32, as price hikes improved profits for retailers.
Takeshi Minami, chief economist at Norinchukin Research Institute, noted, "Despite the yen's rebound since mid-July, large manufacturers' sentiment remains unexpectedly solid. Overall results are positive, considering various risk factors such as a stronger yen, pressure to raise wages, and downside risks to the global economy."
Even with an 11% increase in the yen during the third quarter, large manufacturers adjusted their dollar/yen forecast for the fiscal year from 142.68 to 144.96. The dollar was trading at 143.725 yen on Tuesday.
Expectations for capital spending among major companies grew by 10.6% for the fiscal year ending in March 2025, slightly below the median forecast of 11.9% and down from 11.1% from three months earlier. Companies anticipate inflation to surpass the BOJ's 2% target over the next one, three, and five years, supporting the central bank's view of progress toward achieving its price goals, essential for further interest rate hikes.
Despite this, Japanese firms showed wariness about future conditions. While large manufacturers are optimistic about the next three months, non-manufacturers expect a decline.
Masato Koike, senior economist at Sompo Institute Plus, mentioned, "Momentum among non-manufacturers could have already faded, including hotels and restaurants that had spiked due to inbound tourism."
The weak yen previously bolstered exports and retail, assisted by a surge in inbound tourism. The recent yen recovery may negatively affect exports and tourism but could alleviate rising import prices for retailers and households.
Since ending negative interest rates in March and raising the short-term policy rate to 0.25% in July, the BOJ is committed to adjusting rates further if companies maintain price and wage increases.
Toru Suehiro, chief economist at Daiwa Securities, stated, "For the BOJ, today's tankan was evidence that things were on track. Its rate-hike cycle will likely continue. The next focus will be how the yen's rise affects business sentiment and inflation, which will be a crucial point of examination at the upcoming tankan."
The next tankan announcement is scheduled for December 13, just prior to the BOJ's policy meeting on December 18-19.
Japan's economy witnessed a 2.9% annualised expansion in the second quarter, underpinned by steady wage hikes boosting consumer spending. Capital expenditure continues to grow, though weak demand from China and slowing U.S. growth cloud the outlook for the export-dependent economy.
The tankan's sentiment diffusion indexes are calculated by subtracting the number of negative responses from positive ones. A positive index indicates more optimists than pessimists among respondents.
Comments (0)