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Japan’s business mood improves, capex firm boosts economic outlook


Buildings are illuminated at night in Tokyo, Japan, on Friday, July 21, 2023.

Toru Hanai | Bloomberg | Getty Images

Japan’s business sentiment improved in the third quarter, a central bank survey showed, suggesting conditions for a durable economic revival are falling into place even as a global slowdown keeps policymakers cautious about the outlook.

Big non-manufacturers’ mood brightened to levels unseen since 1991, when Japan was experiencing an asset-inflation bubble, a sign retailers were benefitting from a rebound in consumption after the dismantling of pandemic curbs.

Companies also retained their robust spending plans and faced a tight labor market, the survey showed, suggesting that conditions for the Bank of Japan to phase out its massive stimulus could fall into place.

The headline big manufacturers’ confidence index rose to 9 in September from 5 in June, the BOJ’s closely-watched “tankan” survey showed, exceeding market forecasts for a reading of 6 and marking the second straight quarter of improvement.

Big non-manufacturers’ index stood at 27, up from 23, the survey showed, above a median market forecast of 24 and improving for the sixth straight quarter. It was highest reading since November 1991.

“The stronger-than-expected improvement in the latest tankan survey suggests that the economy will continue to expand at an above-trend pace, which is contributing to mounting staff shortages and persistent price pressures,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

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Many big companies said they were able to pass on higher costs to consumers, leading to the improvement in the business mood, a BOJ official told a briefing.

A rebound in auto output and falling raw material costs also helped lift sentiment, though some smaller firms said they were struggling to hike prices, the official said.

Big firms expect to increase capital expenditure by 13.6% in the current fiscal year ending in March 2024, matching market estimates, after a 11.7% rise in fiscal 2022, the tankan showed.

In a sign that wages could keep rising, an index gauging firms’ views on labor market was the tightest since 2019 for big manufacturers, and since 1992 for non-manufacturers.

The survey showed big manufacturers expect conditions to improve three months ahead, though sluggish global demand and signs of weakness in China’s economy cloud the outlook.

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“The tankan showed Japan is on track for a domestic-demand led growth. But the overseas outlook is a source of concern, such as whether the U.S. economy can achieve a soft landing” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.

The tankan is likely to be closely scrutinized by BOJ policymakers in determining whether economic conditions are falling into place to start raising interest rates.

On the inflation outlook, companies expect prices to rise 2.5% a year ahead, 2.2% three years from now and 2.1% five years ahead, roughly unchanged from their projections three months ago, the tankan showed.

Japan’s economy expanded an annualized 4.8% in April-June as robust exports offset weaknesses in consumption. But analysts expect a mild contraction in the July-September quarter as sluggish global demand weigh on exports.

Corporate earnings and business sentiment will be key to whether wages will keep rising next year in tandem with higher inflation, and lay the groundwork for the BOJ to phase out its massive monetary stimulus.



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