Japanese Business Mood Improves Slightly, But Global Risks Remain

Japanese business confidence edged higher in the three months to December, according to a Bank of Japan (BOJ) survey released Friday, offering some reassurance to the central bank as it navigates a gradual path toward higher interest rates, reports Reuters.

While sentiment among large manufacturers improved, rising to +14 from +13 in the previous quarter, non-manufacturers showed more mixed results. Retailers, hotels, and restaurants struggled with rising labor and raw material costs, offsetting gains driven by strong inbound tourism.

The survey, known as the "tankan," highlights an intensifying labor shortage as a key challenge for companies and a potential drag on economic growth. Companies anticipate weaker business conditions in the next three months, citing slowing global demand and uncertainty surrounding the policies of US President-elect Donald Trump.

"Companies seem to be weathering headwinds from China's economic weakness. This is good news for the BOJ and shows things are on track for the economy and prices," said Saisuke Sakai, chief economist at Mizuho Research & Technologies.

The BOJ's official at the briefing attributed the improvement in the manufacturing sector to a rebound in auto production and robust demand for equipment as companies invest heavily in capital expenditures.

"Demand from inbound tourism remains strong but may be peaking, while households may be becoming more frugal," said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute, to Reuters.

Despite these challenges, large companies expect to increase capital expenditure by 11.3% in the fiscal year ending March 2025, exceeding market forecasts for a 9.6% rise. Meanwhile, small non-manufacturers saw a significant improvement in sentiment, reaching levels last seen in 1991, as they benefited from passing through higher costs to consumers.

This suggests that sustained price increases, a key prerequisite for further BOJ rate hikes, are becoming established in the Japanese economy. Companies anticipate inflation remaining above the BOJ's 2% target for at least the next five years.

However, the BOJ's path to higher rates remains cautious. "The outlook is highly uncertain due partly to Trump's tariff policies, which could weigh on automakers' profits," warned Sakai to Reuters. "Non-manufacturers are also cautious about the outlook as they feel the pinch from labor shortages. The outlook for consumption is also weak due to prolonged price rises."

The BOJ, having already raised rates twice this year, is expected to closely scrutinize both domestic and international economic developments at its upcoming policy meeting next week. While sources indicate a preference for keeping rates steady for now, no final decision has been reached.