Japan business mood reaches 8-year high, bolsters case for BOJ hikes

TOKYO, Oct 1 : Japanese business confidence hit an eight-year high over July-September amid elevated inflation expectations, a central bank survey showed, indicating an economy weathering the Middle East conflict and bolstering the case for interest rate hikes.

Confidence is among factors the Bank of Japan will consider in its quarterly growth and inflation forecasts this month, which are likely to offer clues as to how soon the bank could raise its policy rate after hiking in September.

The headline index measuring big manufacturers' business sentiment reached +24 in September from +22 in June, the highest since March 2018, the BOJ's "tankan" survey showed. That compared to the +25 average analyst estimate.

Optimism was driven by strong earnings as manufacturers were able to pass customers costs stemming from the US-Iran war, reflecting resilient demand and growing pricing power.

The survey showed companies forecast inflation at 2.6 per cent in three years and 2.5 per cent in five, signalling expectations of inflation beyond the BOJ's 2 per cent target for a prolonged period.

"The survey results show underlying price pressure remains firm, with firms continuing to indicate they have little choice but to pass on higher costs in selling prices," said principal economist Shinichiro Kobayashi at Mitsubishi UFJ Research and Consulting.

"Taken together with improving business sentiment, the results are likely to reinforce the BOJ's view that inflation will remain persistent, leaving little room to ease its vigilance against rising prices," Kobayashi said.

The BOJ raised its policy interest rate to a 31-year high last month. Its governor signalled the bank has entered a phase focused on preventing inflation from overshooting its target, raising the prospect of further hikes.

An index measuring big non-manufacturers' sentiment was +35, versus +37 in June and the +36 market view, in the first decline in five quarters. The level remained high partly due to a labour shortage, rising wages and pressure on household spending.

The survey also showed big firms aim to raise capital spending by 11.3 per cent in the financial year through March, indicating the muted affect of the Middle East conflict.

The results indicate the BOJ's hikes have had a limited impact on corporate financing conditions, likely easing concern that higher borrowing costs could derail business investment, and leaving room for further policy normalisation, said senior economist Masato Koike at Sompo Institute Plus.