Japanese business sentiment has witnessed a significant improvement in the second quarter, indicating a steady economic recovery for the country. According to a survey conducted by the Bank of Japan, the removal of pandemic restrictions and the stabilization of raw material costs have contributed to the uplift in business confidence, leading to increased factory output and consumption.
The latest tankan survey, released by the Bank of Japan, reveals that companies are now anticipating a rise in capital expenditure. Additionally, they expect inflation to surpass the central bank’s 2% target over the next five years. This positive outlook offers policymakers hope that the conditions necessary for scaling back the massive monetary stimulus are gradually falling into place.
Atsushi Takeda, chief economist at Itochu Economic Research Institute, expressed confidence in Japan’s moderate economic recovery, stating, “The tankan confirmed our view that Japan’s economy is on track for a moderate recovery.” Takeda also noted the decline in input prices while highlighting the continued rise in output prices, indicating that companies are successfully passing on costs. This development bodes well for the Bank of Japan’s inflation outlook and may prompt adjustments to its yield control policy later this year.
The survey revealed that the headline index measuring the mood among big manufacturers stood at plus 5 in June. This marks a recovery from the two-year low of plus 1 recorded in March, signifying that firms are gradually bouncing back from the impact of rising raw material costs and supply disruptions. The June reading, surpassing the median market forecast of plus 3, represents the highest level since December 2022.
Meanwhile, the sentiment index for big nonmanufacturers improved to plus 23 in June, surpassing the plus 22 recorded three months earlier. This increase marks the fifth consecutive quarter of improvement and represents the highest level since June 2019. Furthermore, the survey indicated that the mood among hotels and restaurants reached a record high as the lifting of COVID-19 restrictions stimulated tourism demand.
The positive results of the tankan survey have had a positive impact on Japan’s Nikkei share average, with investors showing optimism regarding the economic outlook. Large firms also have ambitious plans for capital expenditure, with a projected increase of 13.4% for the current fiscal year ending in March 2024. This surpasses the 3.2% increase initially projected in the March survey and exceeds the median market forecast of a 10.1% rise.
However, despite the positive sentiment, there are concerns about the impact of a weak yen on retailers and service-sector firms, particularly those vulnerable to the rising cost of food and energy imports. While a weaker yen may boost exporters’ profits, it could potentially create challenges for other sectors.
Looking ahead, big manufacturers expect business conditions to improve in the coming three months. In contrast, nonmanufacturers anticipate a deterioration due to concerns over high costs, as revealed by the tankan survey.
The Bank of Japan closely monitors the tankan survey data. The central bank is set to release fresh quarterly growth and inflation forecasts following its policy meeting scheduled for July 27 and 28. Despite inflation having exceeded the 2% target for over a year, BOJ Governor Kazuo Ueda has emphasized the importance of maintaining an ultraloose monetary policy until wages increase sufficiently to sustainably support price growth around the target level.
According to the tankan survey, corporate inflation expectations have moderated in June compared to three months ago but remain above the BOJ’s target over the next five years. Additionally, companies now anticipate inflation to reach 2.6% within a year, down from the previous projection of 2.8% made in March. Over a three-year period, inflation expectations have decreased from 2.3% in March to 2.2%, while the projection for five years remains unchanged at 2.1%.
Japan’s economy expanded by an annualized rate of 2.7% in the first quarter, and analysts predict continued growth driven by increased domestic spending in the post-pandemic period, offsetting any headwinds to exports resulting from global growth slowdown.
In conclusion, Japan’s business sentiment has shown considerable improvement, signaling a steady economic recovery. The tankan survey’s positive results have instilled optimism among policymakers, while businesses plan to increase capital expenditure, projecting sustained inflation above the Bank of Japan’s target. As Japan’s economy continues to expand, focus will remain on the upcoming policy meeting and the central bank’s quarterly forecasts, shaping the nation’s economic trajectory.