Confidence among Japan’s large manufacturers rose to an eight-year high in the September quarter, adding evidence that the economy is absorbing higher costs while the Bank of Japan considers further interest-rate increases. The headline Tankan business-conditions index for large manufacturers climbed to +24 from +22 in June, the central bank’s survey showed. The result was just below the +25 consensus reported by Reuters and was the strongest reading since March 2018.
The Tankan measures the percentage of companies describing conditions as favorable minus those describing them as unfavorable, so a positive reading indicates that optimists outnumber pessimists. The Bank of Japan surveyed 9,104 enterprises between August 26 and September 30, including 1,631 large companies, and reported a 99.4% response rate. Sentiment improved for a sixth consecutive quarter, according to the Associated Press.
The details were more mixed outside large manufacturing. Confidence among large non-manufacturers eased to +35 from +37 and missed a market forecast of +36, while large manufacturers projected their index would slip to +21 in December. Across all enterprises and industries, the conditions index increased to +21 from +18, but respondents forecast it would fall to +15 in the next survey. The combination points to current resilience alongside more cautious expectations for the end of the year.
Reuters reported that manufacturers’ confidence was supported by strong earnings and their ability to pass on costs associated with the US-Iran conflict. The AP noted that elevated oil prices remain a challenge after disruptions linked to the Strait of Hormuz. Even so, the survey showed companies expecting consumer prices to rise 2.6% over the next three years and 2.5% over five years, both above the Bank of Japan’s 2% inflation target.
The data arrive after the Bank of Japan raised its policy rate to 1.25% in September, the highest level in 31 years. The central bank will consider the Tankan when preparing updated quarterly growth and inflation forecasts later in October. Separately, the BOJ’s summary of opinions from its September 17-18 meeting showed broad support for continued policy normalization, while members differed over how quickly subsequent increases should be delivered.
What it means for traders: The +24 manufacturing reading and above-target corporate inflation expectations support the scenario in which the BOJ keeps further rate increases under consideration. For USD/JPY, stronger evidence of Japanese economic resilience can increase attention on the timing and pace of BOJ tightening relative to Federal Reserve policy. The counter-scenario is also visible in the survey: softer non-manufacturing confidence and weaker December forecasts could favor a more gradual BOJ path if upcoming inflation and activity figures lose momentum.
The next major signals will be Japan’s inflation data and the BOJ’s October 29-30 policy meeting, when updated projections are expected. Traders will watch whether price expectations remain above target, whether the yen’s weakness continues to lift import costs, and whether business confidence translates into firmer investment and wages. Those indicators will help determine whether September’s rate increase is followed by another move before year-end or by a longer assessment period.