Improving Japan business mood signals steady economic recovery

TOKYO  -Japanese business sentiment improved in the second quarter as raw material costs peaked and the removal of pandemic curbs lifted factory output and consumption, a central bank survey showed, a sign the economy was on course for a steady recovery.

Companies expect to increase capital expenditure and project inflation to stay above the Bank of Japan’s 2 percent target five years ahead, the quarterly “tankan” showed, offering policymakers hope that conditions for phasing out their massive monetary stimulus may be gradually falling into place.

The headline index measuring big manufacturers’ mood stood at plus 5 in June, bouncing back from a two-year low of plus 1 hit in March in a sign firms were recovering from the hit from rising raw material costs and supply disruptions. The reading, which compared with a median market forecast for plus 3, was the highest since December 2022.

The sentiment index for big non-manufacturers improved to plus 23 in June from plus 22 three months ago, increasing for the fifth straight quarter and hitting the highest level since June 2019, the survey showed on Monday.

“The results turned out a bit stronger than expected, helped by recovery in automobiles and energy sectors. Strong capital expenditure also led to brighter sentiment among machinery makers,” said Atsushi Takeda, chief economist at Itochu Economic Research Institute.

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“The tankan confirmed our view that Japan’s economy is on track for a moderate recovery.”

Big manufacturers expect business conditions to improve three months ahead, while non-manufacturers project a deterioration, the survey showed.

Large firms plan to ramp up capital expenditure by 13.4 percent in the current fiscal year ending in March 2024, exceeding the 3.2 percent increase projected in the March survey. The increase compared with a median market forecast for a 10.1 percent rise.

The tankan also showed companies expect inflation to hit 2.6 percent a year from now, down from a 2.8 percent projection made in March.

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Inflation expectations stood at 2.2 percent in three years, down from 2.3 percent in March, and 2.1 percent five years from now, unchanged from the projection in March, the survey showed.

Japan’s economy grew an annualized 2.7 percent in the first quarter and analysts expect it to continue expanding, as a post-pandemic pickup in domestic spending offset headwinds to exports from slowing global growth.

BOJ Governor Kazuo Ueda has repeatedly stressed the need to keep monetary policy ultra-loose until inflation can sustainably hit the bank’s 2 percent target accompanied by solid wage growth.

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