Japan’s Factory Sentiment Improves, Firming Up BOJ Hike Case

Confidence among Japan's large manufacturers rose to the highest level in four years, reinforcing market expectations for the Bank of Japan to raise interest rates this week.

The business sentiment index advanced to 15 this month from 14 in September, the BOJ's quarterly Tankan business survey showed Monday. The result matched the median economist forecast in a Bloomberg poll.

The gauge for large non-manufacturers held at 34, remaining near the strongest level since the early 1990s. A positive reading means more firms view conditions as "favorable" than "unfavorable."

The Tankan, one of the most closely scrutinized data sets released by the BOJ, suggests Japan's businesses have so far avoided significant fallout from US tariffs — a source of uncertainty the central bank has highlighted for months. The results strengthen the case for Governor Kazuo Ueda's board to raise rates on Friday, which would mark the first increase since January.

The data showed confidence improved among oil and coal product makers, offering the BOJ an early read on how firms are responding to lower US tariffs after reductions took effect in mid-September. Roughly 70% of companies had submitted responses to the previous survey days before that change.

A still-weak yen continues to aid exporters while increasing running costs for service sector firms, which employ most of Japan's workforce. Companies expected the yen at 147.06 against the dollar for this fiscal year in Friday's data, weaker than the 145.68 they predicted in Septermber.

Ueda repeatedly cited uncertainty over US tariffs and the initial momentum of wage negotiations as factors that would be critical for authorities considering the next rate hike.

While uncertainties around US levies have somewhat receded, Japan's ties with China have deteriorated after Prime Minister Sanae Takaichi's remarks on Taiwan last month. That's raised concerns over potentially new economic spillovers including a sharp drop in the number of Chinese tourists.

Source: Bloomberg Europe