Japan's Mixed Business Mood Leaves BOJ Rate Hike Decision Uncertain

The Bank of Japan's next move on interest rates is still uncertain after mixed signals from Japanese manufacturers' business sentiment.

A central bank survey, known as the 'tankan', showed that manufacturers' confidence reached an eight-year high over July-September due to strong global AI demand and receding supply constraints. However, non-manufacturers' mood soured, with big non-manufacturers' sentiment sliding to +35 from +37 in June.

The survey's results may soften the chance of a back-to-back rate hike this month, as corporate inflation expectations remained elevated but did not accelerate from three months earlier. The BOJ raised its policy interest rate to 1.25% last month and signalled readiness to hike further to prevent inflation from overshooting its target.

BOJ Governor Kazuo Ueda highlighted elevated inflation expectations as among key factors convincing him that underlying inflation was nearing the bank's 2% target. The survey showed companies forecast inflation at 2.6% within three years and 2.5% in five, signalling expectations of inflation beyond the BOJ's target for a prolonged period.