Japan Business Sentiment Improves Slightly in Positive Sign for Rate-Hike Hopes — Update
2024-12-13
Category: economic

By Megumi Fujikawa
TOKYO--Sentiment among large Japanese manufacturers improved slightly in the final quarter of the year, adding more evidence of economic recovery just a week before a closely-watched meeting at the Bank of Japan.
Japanese businesses have been weighing mixed signals on the outlook for the year ahead, including a recovery in domestic auto production and fears over a global economic slowdown.
The BOJ's quarterly tankan corporate survey released Friday showed that the main index gauging sentiment among big manufacturers was +14. That was slightly higher than the +13 reading in the previous survey in September and the +12 expected by economists. The index represents the percentage of companies that said business conditions were favorable minus those that said conditions were unfavorable.
The survey showed some positive signs that could bolster views that the central bank will soon raise interest rates.
Japanese companies plan to increase their capital spending by 11.3% in the fiscal year ending in March, compared with a 10.6% increase planned in the previous survey. That suggests they are more confident in their business outlook.
In a sign that economic improvements are becoming more widespread, the index measuring sentiment among small non-manufacturers rose sharply to its highest level since August 1991.
The gauge also showed that Japanese companies expect inflation to remain above the bank's target of 2%. Companies of all sizes expect overall prices to rise by 2.4% a year from now, unchanged from the forecast shown in the September survey.
BOJ Gov. Kazuo Ueda has said the bank will keep raising interest rates as long as the economy and prices move in line with the bank's projections.
The tankan results are "unlikely to change the BOJ's assessment of the economy and prices being on track nor prevent it from considering a further rate hike," said Mizuho Securities economist Ryosuke Katagi.
Some economists expect the BOJ to raise its policy rate to 0.5% from 0.25% at its meeting next week. Others say the central bank will wait until January due to uncertainties surrounding the global economy, especially the impact of economic policies under President-elect Donald Trump.
Mizuho's Katagi said Friday's figures were positive but not strong enough to ensure that the central bank will take action at its meeting ending Thursday. The yen briefly weakened to 152.95 against the dollar from around 152.60 before the release of the tankan.
Policymakers are carefully watching to see if wage growth, stronger spending and steady inflation will interact more smoothly. However, the tankan showed some worrying signs in the service sector, indicating that consumption hasn't fully recovered yet.
The index for sentiment among large non-manufactures stood at +33, compared with +34 in the previous survey. Although the overall figure remained solid, deterioration was more evident in some sectors, including among big retailers where the sentiment gauge fell by 15 points. Hotel and restaurant operators recorded a 12-point drop on the index.
Meanwhile, the index for companies of all sizes and industries came in at +15, compared with +14 in the previous survey. According to Capital Economics, that is consistent with gross domestic product growth slowing down to around 0.1% on quarter. Real GDP expanded 0.3% in the third quarter, according to revised data.
Economists at Nomura view a December rate increase as likely, but say that if the central bank does decide to skip tightening next week, the reason why will be telling.
In a research note, Kyohei Morita and Uichiro Nozaki said that if the BOJ decides to forgo a rate hike in December because of uncertainties or fiscal policy considerations, like increased momentum for fiscal support for households or the potential impact on how the government draws up its initial budget for 2025, they see good prospects for a rate hike in January.
"By contrast, if the BOJ decides to skip a rate hike in December not because of uncertainties but because it thinks [economic] fundamentals are not firm enough, we then see prospects of it skipping a rate hike in January too," they said, as the data that the central bank looks at is unlikely to show substantial changes from now until the first meeting of next year.
Write to Megumi Fujikawa at megumi.fujikawa@wsj.com