(Bloomberg) -- Confidence among Japan’s large firms remained upbeat, broadly in line with the Bank of Japan’s view ahead of a policy meeting next week that’s dividing analyst opinions over whether a rate hike is coming.
An index of sentiment among the country’s biggest manufacturers edged up to 14 in December, according to the BOJ’s quarterly Tankan report Friday. The gauge for the biggest non-manufacturers was slightly down to 33 from 34. Economists had expected the readings to hold at 13 for manufacturers and edge down to 33 for the service sector.
A positive number means optimists outnumber pessimists. Confidence among smaller firms also improved, for both the manufacturing and service sectors, although the outlook was a little weaker or remained unchanged.
“Today’s data confirm Japan’s economy is coming along with the BOJ’s expectations,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities. “Although there is nothing to suggest they must avoid a rate hike this month, there isn’t anything that indicates they must rush now.”
The Tankan, a closely watched report by the BOJ, is one of the last major domestic data sets that the central bank will be scrutinizing before its rate decision on Dec. 19.
The results suggest that Japan’s economy is developing in line with the central bank’s outlook, a condition for further rate hikes. Traders are leaning toward expecting the BOJ’s next move to come in January over December, but still see a risk of possible action next week.
The mood among Japanese businesses is key as BOJ Governor Kazuo Ueda is trying to discern if they will raise pay to help solidify a wage-inflation cycle to justify increasing borrowing costs from 0.25%. The report follows a bout of recent economic data that have shown Japan’s continued recovery. The country’s GDP was slightly revised up for the three months ended in September earlier this week.
What Bloomberg Economics Says...
“The BOJ will likely focus on the price-related gauges in the survey. These show firms expect inflation to stay above the 2% target. This is another go-signal for the central bank to pare stimulus — it’s just a matter of timing.”
— Taro Kimura, economist
Click here to read the full report
Price growth expectations among businesses remained solid, without any dramatic change. The average expected annual rate of inflation in five years time was 2.2%, unchanged from the previous report.
Friday’s release was the first Tankan report after Donald Trump won the US presidential election and announced his plan for raising tariffs for China, Canada and Mexico where Japanese manufacturers have factories. Business investment is a likely first area to show any concerns for rising uncertainties, but Friday’s data didn’t show a significant shift so far.
Japan’s large companies across industries plan to ramp up their investment by 11.3% for this fiscal year through March, climbing from 10.6% in the previous data.
“It’s just too early to predict what’s coming and take it into account in their business plan,” said SMBC Nikko’s Maruyama.
The Tankan also continued to show tightness in the labor market, something the BOJ sees as a driver for wage growth and inflation. An index for employment conditions was -36 for all industries across companies, staying around the lowest level since 1991 and signaling a clear labor shortage. With inflation elevated for the past two and a half years as well, labor unions are demanding record high pay hikes for the spring wage negotiations next year.
“The BOJ has said its decisions will be data-dependent, and looking at the current environment, I think the BOJ should raise interest rates in December,” said Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute. “However the mood is shifting toward waiting until January. I think there is considerable confusion in terms of the BOJ’s communication.”
(Updates with economist comments, details from report.)
©2024 Bloomberg L.P.
