BOJ Tightening Case Intact Despite Eased Yen Rate Expectations

Japan's latest Tankan report has reaffirmed the case for further tightening by the Bank of Japan (BOJ), but traders have eased expectations for a faster pace of hikes. The survey showed that sentiment among large manufacturers improved to 24 from 22, its strongest reading in years, while small manufacturers strengthened to 14 from 9.

However, other parts of the survey remain relatively firm, with employment conditions staying deeply negative at -38 and signalling persistent labour shortages. Firms also expect further output price increases, which is an important detail for the BOJ as it suggests that businesses still expect to pass higher costs through to customers.

The inflation expectations in Japan remain above the BOJ's 2% target across the one-, three- and five-year horizons, with the one-year outlook easing only slightly to 2.6%. This should keep further policy normalisation on the table, but traders have become less aggressive about the path ahead.