Japan downgraded its first-quarter gross domestic product (GDP) on Monday, while the service-sector business sentiment worsened in June due to concerns over rising costs. This offset an increase in factory confidence, indicating potential weaknesses in consumption.
However, the "tankan" quarterly survey revealed that firms plan to increase capital expenditure and expect inflation to remain around the Bank of Japan's target of 2% in the coming years, maintaining market expectations of a near-term interest rate hike.
These findings, ahead of the Bank of Japan's next policy meeting on July 30 and 31, complicate the decision on the timing of an interest rate increase, analysts suggest.
"The improvement in business sentiment may have peaked, especially for non-manufacturers. This data doesn't strongly support an early rate hikeby the BOJ," said Toru Suehiro, chief economist at Daiwa Securities.
"However, slightly heightened corporate inflation expectations will likely keep market expectations for a near-term rate hike alive."
A rare unscheduled downgrade to Japan's historical GDP data showed the economy contracted more than previously reported in the first quarter, likely prompting the BOJ to cut its growth forecasts this month.
Separately, the tankan survey indicated that service-sector firms were less optimistic in June compared to three months ago, suggesting that a tight job market and soft consumption were impacting sentiment.
An index measuring sentiment among large non-manufacturers fell to +33 in June from +34 in March, matching market forecasts and marking the first decline in two years.
Conversely, the headline index for large manufacturers rose to +13 in June from +11 in March, exceeding the median market forecast of +12. This increase, the highest since March 2022, was attributed to a rebound in auto production and the successful passing of rising raw material costs through price hikes.
Big firms plan to increase capital expenditure by 11.1% in the current fiscal year ending in March 2025, up from a 10.6% increase in the previous year, according to the tankan.
The survey also showed rising inflationary pressures, with an index of output prices increasing for both manufacturers and non-manufacturers. Long-term corporate inflation expectations also rose slightly, with companies projecting inflation to reach 2.3% in three years and 2.2% in five years.
"Corporate inflation expectations appear anchored at 2%," said Ko Nakayama, chief economist at Okasan Securities. "The tankan is a tailwind for the BOJ in normalizing monetary policy."
The Nikkei stock average rose 0.12% on Monday, paring gains after the tankan on expectations that rising inflation prospects will prompt the BOJ to raise rates soon.
GDP MAY AFFECT BOJ RATE HIKE TIMING
The BOJ ended negative interest rates in March, viewing the sustained achievement of its 2% inflation target as imminent. Governor Kazuo Ueda has indicated the possibility of more hikes if underlying inflation trends toward 2%, as projected.
Many market participants expect the BOJ to raise rates again this year, with some betting on action in July. However, others see obstacles to acting so soon.
A revision to historical data showed Japan's GDP contracted an annualized 2.9% in January-March, down from an earlier estimate of a 1.8% contraction, due to corrections in past data on construction orders. GDP for the third and fourth quarters of last year was also revised downward.
These revisions, along with recent weak consumption and output data, are likely to impact the BOJ's quarterly growth and price forecasts at its July 30-31 policy meeting.
Yoshiki Shinke, an economist at Dai-ichi Life Research Institute, expects the GDP revisions to lead to a significant downgrade in this fiscal year's growth forecast.
"I wonder if the BOJ can manage to trim bond buying and hike rates simultaneously in July, given the growth downgrade showing the economy was in worse shape than thought," he said.
Paraphrasing text from "Reuters" all rights reserved by the original author.
