Japan’s business sentiment improved in the third quarter of 2023, reaching the highest level since 1991, according to a central bank survey released on Monday. The survey suggested that the conditions for a durable economic revival are falling into place, despite the challenges posed by the global slowdown and the COVID-19 pandemic.
Business confidence rises across sectors
The Bank of Japan’s (BOJ) closely-watched “tankan” survey showed that the headline big manufacturers’ confidence index rose to 9 in September from 5 in June, exceeding market forecasts for a reading of 6 and marking the second straight quarter of improvement. The index measures the difference between the percentage of firms that are optimistic and those that are pessimistic.
Big non-manufacturers’ index stood at 27, up from 23, the survey showed, above a median market forecast of 24 and improving for the sixth straight quarter. It was the highest reading since November 1991, when Japan was experiencing an asset-inflation bubble. The survey indicated that retailers were benefitting from a rebound in consumption after the lifting of pandemic curbs.
Small and medium-sized enterprises also reported better business conditions, with their confidence indexes turning positive for the first time since 2018.
Capital expenditure and inflation expectations remain robust
The tankan survey also showed that companies retained their strong spending plans and faced a tight labor market, suggesting that domestic demand could support economic growth in the coming quarters.
Big firms expect to increase capital expenditure by 13.6 per cent in the current fiscal year ending in March 2024, matching market estimates, after a 11.7 per cent rise in fiscal 2022, the survey showed. Capital expenditure is a key driver of Japan’s economy, as it reflects corporate investment in new equipment, facilities, and technology.
The survey also revealed that companies project inflation to stay above the BOJ’s 2 per cent target five years ahead, indicating that price pressures are building up amid rising costs and labor shortages. The BOJ has been struggling to achieve its elusive inflation goal for years, despite its massive monetary stimulus program.
Outlook remains cautious amid external risks
The tankan survey showed that big manufacturers expect business conditions to improve slightly three months ahead, while big non-manufacturers expect them to remain unchanged.
However, the outlook remains clouded by external risks, such as the sluggish global demand and the signs of weakness in China’s economy. Japan’s exports, which have been a bright spot for the economy, could face headwinds from supply chain disruptions and chip shortages.
The survey also highlighted some challenges for domestic demand, such as the uncertainty over the COVID-19 situation and the impact of higher energy prices on consumer spending.
The tankan is likely to be closely scrutinized by BOJ policymakers in determining whether economic conditions are falling into place to start raising interest rates. The BOJ has kept its policy rate at -0.1 per cent since 2016 and has pledged to maintain it until inflation exceeds its target.
