Recent data from Japan has shown a mixed economic outlook, with Japanese big manufacturers’ confidence reaching a more than two-year high, while the service-sector mood has soured due to rising costs driven by the weak yen. According to a central bank survey, the improvement in business sentiment may have peaked, especially for non-manufacturers. The findings have complicated the Bank of Japan’s decision on how soon to raise interest rates, with analysts suggesting that an early rate hike may not be on the horizon based on this data.
While the headline sentiment index for big manufacturers showed a positive trend, with the index hitting +13 in June, up from +11 in March, the mood among service-sector firms was less optimistic. The survey revealed that rising labor costs and high imported raw material prices were squeezing margins for non-manufacturers, leading to a decline in sentiment for the first time in two years.
Despite the challenges faced by the service sector, the survey indicated that long-term corporate inflation expectations have risen slightly. Companies are projecting inflation to hit 2.3% three years from now and 2.2% five years ahead. This could keep market expectations alive for a near-term rate hike, as companies look to pass on rising raw material costs through price hikes.
On the other hand, a rare unscheduled downgrade to Japan’s historical GDP data revealed that the economy shrank more than reported in the first quarter. This downgrade is likely to force the central bank to cut its growth forecasts, impacting its policy decisions at the upcoming meeting. The revisions to the GDP data are expected to have implications for the BOJ’s quarterly growth and price forecasts, further complicating the path for a rate hike.
The Bank of Japan ended eight years of negative interest rates and other radical monetary stimulus measures in March as it believed that the sustained achievement of its 2% inflation target was within reach. Although many market players anticipate another rate hike from the current near-zero levels this year, there is uncertainty about the timing of such a move.
BOJ Governor Kazuo Ueda has emphasized the importance of evidence showing that underlying inflation will durably meet the 2% target before further rate hikes are considered. Despite inflation remaining above the BOJ’s target for two years, Japan’s fragile economic recovery poses challenges to the central bank’s rate hike path.
The recent economic data from Japan has highlighted the divergent trends in business sentiment among manufacturers and service-sector firms. While manufacturers are more optimistic, non-manufacturers are facing challenges from rising costs, leading to a mixed economic outlook. The central bank’s decision on interest rates will be closely watched, as it navigates the delicate balance between supporting economic growth and achieving its inflation targets in a challenging economic environment.
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