Japan Business Mood Remains Firm, Keeping BOJ on Hike Track

(Bloomberg) - Confidence among Japan's large firms proved a touch more bullish than expected, an outcome that keeps the the Bank of Japan on track to consider a rate hike late this year or early next.

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An index of sentiment among the country's biggest manufacturers held steady at 13 in September, according to the BOJ's quarterly Tankan report Tuesday. The gauge for the biggest non-manufacturers ticked up to 34. Economists had expected the readings to decline to 12 for manufacturers and to 32 for the service sector.

The figures for both groups show optimists outnumber pessimists.

The Tankan survey is among the key data points released before BOJ board members next set policy on Oct. 31. While factors including elections in Japan and the US are expected to keep the BOJ on hold, the continued strength in the reading may prompt economists to consider a rate hike in their risk scenarios for the meeting.

"Today's Tankan report confirmed a recovery in demand, which is the starting point of a virtuous cycle," said Atsushi Takeda, chief economist at Itochu Research Institute. "Businesses maintained their price outlook, indicating that there are no obstacles for the BOJ to raise interest rates at this point."

Firms in a variety of sectors and sizes kept their inflation outlooks unchanged, according to Tuesday's report. The latest Bloomberg survey showed that a majority of economists forecast the bank will raise borrowing costs by the end of January, with 15% anticipating a move in October.

The Tankan data also showed that among manufacturers, electronic equipment and ship and heavy machinery makers' moods improved, while it slumped for oil and coal product makers.

Sustained optimism among manufacturers may have been helped by a recovery in the semiconductor demand cycle. Japan's tech sector has benefited from a wave of global demand for artificial intelligence development, which has generated high demand for advanced semiconductors and related machinery. Earlier data showed that the country's export of chip manufacturing equipment gained 55% from a year ago in August.

Sentiment among service sector firms also unexpectedly improved a tad, led by retailers and construction firms, and also supported by the hospitality sector. The number of foreign visitors to Japan hit 2.93 million in August, 16.4% more than the same month of pre-pandemic 2019, the Japan National Tourism Organization said in a release last month.

What Bloomberg Economics Says...

"Signals in the Bank of Japan's Tankan survey — surprisingly strong business sentiment, particularly in the service sector, and expectations that inflation is likely to stay above the 2% target — suggest the economy is ready for the BOJ to pare stimulus further."

— Taro Kimura, economist

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The solid business sentiment will likely be welcomed by incoming premier Shigeru Ishiba, who is expected to be elected prime minister later Tuesday after he prevailed in last week's Liberal Democratic Party leadership vote. Ishiba said he will call a national election for Oct. 27.

A separate report by the Labor Ministry Tuesday showed that Japan's job market remained tight in August. The country's unemployment rate dropped to 2.5% from 2.7% a month earlier, while the job-to-applicant ratio edged down to 1.23 from 1.24, meaning that there were 123 job posts available to every 100 applicants.

The tight labor market is a factor keeping upward pressure on wages, as companies compete to retain staff and lure new hires. Companies and labor unions will soon lay the groundwork for next year's pay negotiations.

-With assistance from Paul Jackson.

(Updates with economist comments, more details from report.)

Japan Business Mood Remains Firm, Keeping BOJ on Hike Track

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