BOJ Tightening Case Intact Despite Softer Yen Rate Expectations
The latest Tankan report from Japan provided a mixed picture of the economy. Sentiment among large manufacturers improved to 24, its strongest reading in years, while small manufacturers strengthened to 14 from 9. However, the services side was less convincing, with large non-manufacturers slipping to 35 from 37 and small non-manufacturers holding at 15.
Manufacturers also expect conditions to soften over the coming quarter, with the large-manufacturing outlook at 21. Yet other parts of the survey remain relatively firm, with employment conditions staying deeply negative at -38 and signalling persistent labour shortages.
The report highlighted price pressures remaining elevated, even if manufacturers expect some moderation in their input costs. The large-manufacturer input-price index eased to 59, with firms expecting it to fall to 55 next quarter. However, the broader output-price index remains firm, with businesses expecting selling-price pressures to rise further.
The BOJ will likely take note of these developments as they consider further policy normalisation. Inflation expectations remain above the 2% target across the one-, three- and five-year horizons, with the one-year outlook easing only slightly to 2.6%. While this supports the case for further tightening, money markets have become less aggressive about the path ahead, with JPY OIS rates easing from recent highs.