Japanese Business Climate Shows Slight Improvement

Foreks - Sentiment among large Japanese manufacturers showed a slight improvement in the last quarter of the year, reaching its highest level since March 2022. The main index measuring sentiment among major manufacturers in the Bank of Japan's quarterly Tankan corporate survey recovered from +13 in September to +14. Economists had expected the index to decline to +12 in December, with a projection of +13 for March. In the non-manufacturing sector survey, the index fell slightly from +34 in September to +33, while the market median forecast was +32. The index is derived by subtracting the percentage of companies reporting negative business conditions from those reporting positive conditions. The survey showed some positive signs that could support views that the central bank will soon raise interest rates. Japanese companies plan to increase capital expenditures by 11.3% in the fiscal year ending in March, up from 10.6% in the previous survey, indicating greater confidence in their business outlooks. The indicator also showed that Japanese companies expect inflation to remain above the bank's target of 2%. Companies of all sizes expect prices to rise by 2.4% one year from now, unchanged from the forecast in the September survey. Participating firms expressed expectations that consumer prices would rise by an annual rate of 2.3% three years from now and 2.2% five years from now. Daiwa Securities economist Mari Iwashita stated, "It is true that while Japan's economic and price movements are consistent with the bank's outlook and the conditions in the U.S. are within expectations, the BOJ is also concerned about risks related to Trump, including the impacts of the new Trump administration's policies." Nomura economists Kyohei Morita and Uichiro Nozaki expect a rate hike in December, but noted that if the central bank decides to skip a rate increase next week, the reasoning would need to be explanatory. Morita and Nozaki emphasized that if the BOJ decides to forgo a rate hike in December due to uncertainties or the increasing momentum for financial support to households, or the potential impact of how the government prepares its first budget for 2025, they see a good possibility for a rate hike in January. "In contrast, if the BOJ decides against a rate hike in December because it believes that the economic fundamentals are not sufficiently robust, then we also see the likelihood of not raising rates in January, as significant changes in the data the central bank is looking at are not very likely from now until the first meeting of next year," they stated.