Japan’s Service Sector Mood Climbs to 33-yr High, Leaves Scope for More BOJ Hikes

Yomiuri Shimbun file photo
The Bank of Japan

TOKYO (Reuters) – Optimism in Japan’s services sector climbed to a 33-year high in the first quarter on booming tourism and rising profits from price hikes, a central bank survey showed, keeping alive market expectations of another interest rate increase before year-end.

That rosy mood was somewhat offset by sentiment for big manufacturers souring for the first time in four quarters due in part to auto output disruptions, underscoring Japan’s fragile economic recovery.

The survey outcome is among factors the Bank of Japan (BOJ) will scrutinize in its next meeting on April 25-26, when it issues fresh quarterly growth and inflation forecasts.

The April projections will draw market attention for any clues on how soon the BOJ could raise interest rates again, after having exited its massive stimulus program last month.

“Business sentiment was good overall and capital expenditure plans are fairly strong. The tankan probably leaves the BOJ with hope Japan will continue to see trend inflation accelerate,” said Tsuyoshi Ueno, an economist at NLI Research Institute.

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

The headline sentiment index for big manufacturers slid to +11 in March from +13 in December, the tankan showed on Monday, as output disruptions at some Toyota Motor group plants hurt confidence among car, auto parts and steel makers. It roughly matched a median market forecast for a +10 reading.

By contrast, the index gauging big non-manufacturers’ sentiment improved to +34 in March from +32 three months ago, the survey showed, slightly exceeding a market forecast of a reading of +33 and increasing for the eighth straight quarter.

It was the highest reading since August 1991, when Japan’s economy was booming from an asset-inflated bubble.

Sentiment improved at retailers, property developers, construction firms and transportation services due to a surge in inbound tourism and a boost to corporate profits from price hikes, a BOJ official told a briefing.


Big firms expect to increase capital expenditure by 4.0% in the fiscal year starting in April, after a 11.5% rise in the previous year, the survey showed.

An index measuring job market tightness showed companies of all sizes faced labor shortages, heightening prospects that wage hikes will broaden, analysts say.

Companies also expected inflation to stay above the BOJ’s 2% target one, three, and five years ahead, the tankan showed.

“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.

There are uncertainties, however, on the outlook.

Both big manufacturers and non-manufacturers expect conditions to worsen three months ahead, according to the survey.

Some companies worried about global economic uncertainty and prospects of rising labor costs due to a tight job market, the BOJ official said.

Smaller firms’ sentiment soured in the first quarter for both manufacturers and non-manufacturers as labor shortages and rising costs hit their businesses, the tankan showed.

“Japan’s economy looks fragile” with manufacturers struggling, Moody’s Analytics said 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.

Japan’s economy expanded an annualized 0.4% in the final quarter of last year, narrowly averting a technical recession as robust capital expenditure offset weaknesses in consumption.

Analysts expect the economy to have barely grown in the first quarter as rising living costs hurt consumption, and output disruptions at some auto factories weighed on industrial production.

Business sentiment and corporate spending appetite are key to whether Japan’s economy can sustain a moderate recovery and allow the central bank to raise interest rates again.

Despite the BOJ’s decision to end negative rates last month, expectations that any further rate hikes by the BOJ will be slow in forthcoming have pressured the yen and briefly pushed it to a 34-year low against the dollar.