Improving Japan business mood signals steady economic recovery

By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) -Japanese business sentiment improved in the second quarter as raw material costs peaked and removal of pandemic curbs lifted 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% target five years ahead, the quarterly “tankan” showed on Monday, offering policymakers hope that conditions for phasing out their massive monetary stimulus may be gradually falling into place.

“The tankan confirmed our view that Japan’s economy is on track for a moderate recovery,” said Atsushi Takeda, chief economist at Itochu Economic Research Institute.

“While input prices have declined, output prices continue to rise in a sign companies are being able to pass on costs. That’s a good sign for the BOJ’s inflation outlook and may prod the bank to tweak its yield control policy later this year.”

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.

Non-manufacturers’ sentiment index improved to plus 23 in June from plus 20 three months ago, increasing for the fifth straight quarter and hitting the highest level since June 2019.

An index gauging the mood among hotels and restaurants hit the highest level on record as removal of COVID curbs boosted tourism demand, the survey showed.

The results helped push up Japan’s Nikkei share average on optimism over the economic outlook.

Large firms plan to ramp up capital expenditure by 13.4% in the current fiscal year ending in March 2024, exceeding a median market forecast for a 10.1% rise.

Companies expect the dollar to average 132.43 yen during the current fiscal year ending in March 2024, the survey showed, far lower than recent levels around 144.50 yen.

While the weak yen boosts exporters’ profits, it may hurt retailers and service-sector firms vulnerable to the rising cost of food and energy imports.

Big manufacturers expect business conditions to improve three months ahead, while non-manufacturers project a deterioration on worries over high costs, the tankan showed.

The tankan is among data closely watched by the BOJ, which will release fresh quarterly growth and inflation forecasts after a policy meeting on July 27-28.

While inflation has exceeded its 2% goal for more than a year, BOJ Governor Kazuo Ueda has repeatedly stressed the need to keep monetary policy ultra-loose until wages increase enough to keep price growth sustainably around the target.

The tankan showed corporate inflation expectations moderate in June from three months ago, but remaining above the BOJ’s target five years down the road.

Companies expect inflation to hit 2.6% a year from now, down from a 2.8% projection made in March, and 2.2% in three years, also lower than 2.3% in March. They see inflation at 2.1% five years from now, unchanged from the projection in March.

Japan’s economy grew an annualised 2.7% 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.

(Reporting by Leika Kihara and Tetsushi KajimotoEditing by Shri Navaratnam)