Japan business mood improves, tankan survey shows

Japanese business confidence strengthened in the three months ending September, according to a quarterly central bank survey released on Thursday, indicating the economy is coping with the impact of the Middle East conflict. This positive development bolsters arguments for additional interest rate increases. The findings will be among the factors influencing the Bank of Japan’s upcoming quarterly growth and inflation forecasts, which could provide insights into when the central bank might raise rates again after the September hike.

The headline index measuring the business sentiment of large manufacturers rose to +24 in September from +22 in June, slightly below market expectations of +25. Meanwhile, the index for large non-manufacturers remained at +35, slightly lower than the previous +37 in June. When asked about their inflation expectations, companies foresee it reaching 2.6% in three years and 2.5% in five years, suggesting that inflation will likely remain well above the Bank of Japan’s 2% target for an extended period.

The Bank of Japan increased interest rates to a 31-year peak last month, with its governor hinting that the central bank has entered a new phase centered on preventing inflation from surpassing its target, thereby paving the way for additional rate hikes.