Positive Outlook for Interest Rate Hikes

In a recent quarterly survey, Japanese big manufacturers' sentiment showed a slight improvement in the three months leading to December, signaling positive prospects for the central bank's plans to gradually increase interest rates from near-zero levels. This data arrives just ahead of the Bank of Japan's two-day policy meeting next week, where the board will discuss the possibility of lifting rates from the current 0.25%.

Business Confidence Index Climbs

The headline index measuring big manufacturers' business confidence stood at +14 in December, marking the highest reading since March 2022. This increase from +13 in the previous quarter outpaced median market forecasts of +12. Meanwhile, an index gauging big manufacturers' sentiment declined slightly to +33 from +34 in September, still above market forecasts of +32.

Capital Expenditure and Future Outlook

Despite the slight decline in sentiment, big companies anticipate a substantial 11.3% increase in capital expenditure for the fiscal year ending in March, surpassing previous projections and market forecasts. However, both big manufacturers and non-manufacturers expect conditions to worsen in the upcoming quarter.

BOJ's Inflation Target and Rate Strategy

The Bank of Japan (BOJ) ended negative interest rates in March and raised its short-term policy rate to 0.25% in July, based on Japan's steady progress towards achieving its 2% inflation target. BOJ Governor Kazuo Ueda emphasizes the central bank's commitment to further rate hikes if companies continue to raise prices and wages, maintaining inflation durably around the 2% target.