Japan’s Major Manufacturers’ Sentiment Remains Stable in Q3, BOJ Tankan Reports

By Makiko Yamazaki and Leika Kihara

TOKYO – Japanese big manufacturers’ business sentiment remained steady in the three months leading up to September, according to a significant central bank survey released on Tuesday. This indicates that the economy is continuing its recovery despite the challenges posed by global economic weakness.

The survey from the Bank of Japan (BOJ) revealed that the mood among large non-manufacturers improved, highlighting the strength of domestic demand. This data will play a crucial role for the BOJ as it sets monetary policy and releases new growth and inflation forecasts at its upcoming meeting on October 30-31.

"Despite the yen’s rebound since mid-July, big manufacturers’ business sentiment remains unexpectedly solid," commented Takeshi Minami, the chief economist at Norinchukin Research Institute. He noted that the results are generally positive when considering several risk factors, including the stronger yen, wage pressure, and downside risks in the global economy.

The headline index for confidence among large manufacturers stood at +13 in September, unchanged from June and in line with market expectations. Meanwhile, the sentiment index for large non-manufacturers increased to +34 from +33 in June, exceeding forecasts which predicted a reading of +32.

However, the survey indicated that Japanese companies are cautious about the future. While big manufacturers foresee improved conditions in three months, non-manufacturers anticipate deterioration.

"Momentum among non-manufacturers may have already diminished, particularly in sectors like hotels and restaurants that had been invigorated by inbound tourism," noted Masato Koike, a senior economist at Sompo Institute Plus.

The survey also revealed that large companies expect to boost capital spending by 10.6% in the fiscal year ending March 2025. This figure is less than the median forecast of an 11.9% increase and lower than the previous quarter’s 11.1% growth.

The BOJ ended its negative interest rate policy in March and raised the short-term policy rate to 0.25% in July, believing Japan is making steady progress towards its 2% inflation target.

BOJ Governor Kazuo Ueda has stated that the central bank will continue to increase rates if companies persist in raising prices and wages due to optimistic forecasts, aiming to maintain inflation around the 2% target.

"The tankan showed that business sentiment has not been significantly impacted by the July rate hike," said Minami from Norinchukin. He noted that while another rate hike in October seems unlikely due to unstable financial markets, a possible increase in December will depend on upcoming consumption data.

Japan’s economy grew at an annualized rate of 2.9% in the second quarter, supported by steady wage increases that bolstered consumer spending. While capital expenditure is on the rise, concerns remain about soft demand from China and slowing growth in the U.S., which complicate the outlook for this export-dependent nation.

The tankan sentiment diffusion indexes are calculated by subtracting the number of respondents who report poor conditions from those who indicate good conditions. A positive reading signifies that optimists outnumber pessimists.