Sentiment at Japan’s major manufacturers improves to highest level in two years, BOJ Tankan Shows

TOKYO (Reuters) – Confidence among major Japanese manufacturers improved in the three months through June to a level not seen in two years, a closely watched survey by the central bank showed, confirming its view that the economy is on track for a moderate recovery.

But the mood among major service sector companies worsened for the first time in four years, the Tankan survey showed on Monday, indicating that rising costs of living due to the weak yen were weighing on consumption.

The outcome, which will be announced ahead of the Bank of Japan’s next policy meeting on July 30-31, makes it harder to decide how quickly to raise rates.

The overall sentiment index for major manufacturers rose from +11 in March to +13 in June, slightly exceeding the average market forecast of +12, the survey showed on Monday.

An index measuring the sentiment of major non-manufacturers stood at +33. This is in line with market expectations and is down from +34 in the previous quarter.

Large companies plan to increase capital spending by 11.1% in the current fiscal year ending March 2025, up from 4.0% in the previous Tankan survey. It compared with an average market forecast for a 13.9% increase.

The BOJ in March ended eight years of negative interest rates and other remnants of its radical monetary stimulus, as it judged that a sustainable achievement of its 2% inflation target was in sight.

Many market players expect the BOJ to raise rates again this year from their current near-zero level, but remain divided over how quickly that will happen.

BOJ Governor Kazuo Ueda has said the central bank will raise interest rates further if there is sufficient evidence that underlying inflation will sustainably meet the 2% target, as the bank predicts.

Although inflation has been above the BOJ’s target for two years, Japan’s fragile economic recovery is clouding the path of rate hikes.

Japan’s economy shrank 1.8% year-on-year in the first quarter as businesses and households cut back on spending. While analysts expect growth to recover in the current quarter, the weak yen is weighing on household sentiment by pushing up the cost of imported fuel and food.