Optimism Rises Among Japanese Big Manufacturers

In a quarterly survey released on Friday, Japanese big manufacturers' sentiment improved slightly in the three months to December, signaling potential support for the central bank's plans to gradually raise interest rates from near-zero levels.

The Bank of Japan's 'tankan' survey revealed that non-manufacturers also remained optimistic about business conditions, though concerns over rising raw material and labor costs impacted retailers' morale.

Economic Constraints and Global Risks

The survey data, released ahead of the Bank of Japan's two-day policy meeting next week, highlights the intensifying labor shortage as a growing concern for companies and a potential constraint to economic growth.

Despite the current optimism, companies expect business conditions to worsen over the next three months due to soft global demand and potential higher tariffs under US President-elect Donald Trump.

Sector-Specific Insights

The headline index measuring big manufacturers' business confidence stood at +14 in December, up from +13 three months ago, marking the highest reading since March 2022. This improvement was largely attributed to a rebound in auto production and robust demand for equipment.

However, the business mood worsened sharply among retailers, hotels, and restaurants as they struggled with hiring staff and faced rising labor and raw material costs.

Investment and Inflation Expectations

Big companies anticipate increasing capital expenditure by 11.3% in the fiscal year ending in March, higher than previously projected. Small non-manufacturers' sentiment improved to levels last seen in 1991, indicating sustained price rises.

Companies expect inflation to stay above the BOJ's 2% target over the next one, three, and five years, suggesting conditions for raising Japan's still-low interest rates are aligning.

Uncertain Future Outlook

Despite these positive indicators, companies anticipate conditions to worsen in the coming months due to high costs, slowing overseas growth, and uncertainty over Trump's policies. The outlook remains highly uncertain, posing challenges for both manufacturers and non-manufacturers.