Japan's Business Sentiment Hits Highest in Years as Tankan Beats Forecasts

Business sentiment among Japan's major manufacturers improved for a fifth straight quarter, according to the Bank of Japan's closely watched Tankan survey released July 1. The headline index for large manufacturers rose to +22 from +17 in the previous survey, its highest level since 2018 and comfortably above economists' expectations. Sentiment among big non-manufacturers was even stronger, reaching a level not seen since the early 1990s. Companies also raised their inflation expectations across every time horizon, projecting consumer prices to rise about 2.7% over the year ahead, up from 2.6% previously, and around 2.6% three and five years out. Large firms said they plan to increase capital spending by more than 11% in the current fiscal year, even as they expect recurring profits to decline, suggesting a willingness to keep investing through margin pressure. The survey, conducted among more than 9,000 companies, strengthens the argument for the central bank to continue normalising policy after it raised its benchmark rate to 1% in June. Persistent labour shortages remained a notable feature across firms of all sizes.