According to a central bank survey, optimism in Japan’s services sector reached a 33-year high in the first quarter due to increasing tourism and rising profits from price hikes. This maintained market expectations of an additional interest rate hike before the year ends.

Sentiment for large manufacturers soured for the first time in four quarters, partly because of disruptions in auto output, which slightly countered that upbeat mood and highlighted Japan’s precarious economic recovery.

When the Bank of Japan (BOJ) releases its most recent quarterly growth and inflation projections on April 25–26, it will examine a number of factors, including the survey results.

The market will be watching the April predictions closely for any hints regarding the timing of the BOJ’s potential rate hike after it ended its huge stimulus programme last month.

“Overall, business confidence was positive, and plans for capital expenditures are not too weak. The BOJ is likely leaving the tankan with the expectation that trend inflation in Japan would continue to pick up speed, according to economist Tsuyoshi Ueno of the NLI Research Institute.

“The results open scope for additional BOJ rate hikes.”

Due to output disruptions at various Toyota Motor group plants, the headline sentiment index for big manufacturers fell to +11 in March from +13 in December, according to data released by the tankan on Monday. This decreased confidence among manufacturers of cars, auto components, and steel. It was about in line with a +10 reading median market forecast.

In contrast, the survey’s index measuring the sentiment of big non-manufacturers increased to +34 in March from +32 three months earlier, somewhat surpassing a reading of +33 predicted by the market and rising for the ninth consecutive quarter.

On Thursday, the S&P 500 recorded its best first-quarter gain in five years, even though U.S. stocks ended the day mostly unchanged.

Since August 1991, when Japan’s economy was growing due to an asset-inflated bubble, this figure has been the highest.

Due to an increase in inbound tourism and a rise in corporate profits from price hikes, sentiment has improved among merchants, real estate developers, construction companies, and transportation services, a BOJ official stated at a briefing.

According to the study, large companies anticipate raising capital spending by 4.0% in the fiscal year that begins in April, following an 11.5% increase the year before.

Companies of all sizes faced a labour shortage, according to an index measuring the tightness of the employment market, raising the likelihood that wage increases will spread, according to economists.

The tankan indicated that businesses also anticipated inflation to remain higher than the BOJ’s 2% objective in the next one, three, and five years.

“The employment index underscores a tight job market and corporate inflation expectations remain high,” said Atsushi Takeda, chief economist at Itochu Economic Research Institute.

“The BOJ should be able to raise rates one more time this year, and possibly twice,” he said.

On the other hand, there are unknowns regarding the future.

According to the poll, conditions are expected to worsen three months ahead of schedule for both large businesses and non-manufacturers.

A tight labour market has some businesses concerned about potential increases in employment expenses as well as instability in the global economy, according to the BOJ official.

The tankan said that the first quarter saw a decline in the mood of smaller enterprises, both manufacturers and non-manufacturers, as a result of labour shortages and growing expenses.

According to Moody’s Analytics, “Japan’s economy looks fragile” due to the difficulties facing manufacturers in a research note on the tankan.

“We expect things to improve in the months ahead, but weak global demand for Japanese goods and China’s fragile recovery will keep a cap on growth in the near term. The weak yen also remains a concern for import-dependent small and midsize producers,” it said.

In the last quarter of 2018, Japan’s economy grew by an annualised 0.4%, just avoiding a technical recession as strong capital expenditures countered poor consumer spending.

Due to increased living expenses that reduce consumption and output problems at some auto plants that hinder industrial production, analysts predict that the economy grew by very little in the first quarter.

If Japan’s economy can maintain a modest recovery and the central bank is able to raise interest rates once more, it will be determined largely by business sentiment and corporate spending appetite.

The anticipation that the BOJ will raise rates gradually has put pressure on the yen, pushing it to a 34-year low against the dollar despite the BOJ’s decision to eliminate negative rates last month.

(Adapted from NewsWav.com)

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