Tankan Report Keeps BOJ Tightening on the Table Despite Softening Yen Rate Expectations

The latest Tankan report from Japan paints a mixed picture of the economy, but it does little to change the case for further tightening by the Bank of Japan (BOJ). While manufacturing sentiment has improved, with large manufacturers' sentiment reaching its strongest reading in years, other parts of the survey remain firm. Labour shortages persist, and firms expect further price increases.

The Tankan shows that manufacturers expect conditions to soften over the coming quarter, but their input costs are expected to fall only slightly, from 59 to 55 next quarter. This suggests that firms still intend to pass higher costs through to customers. Inflation expectations remain above the BOJ's 2% target across all horizons, including the one-, three- and five-year outlooks.

The report also notes that JPY OIS rates have eased from recent highs, particularly across the six-month to one-year tenors, indicating traders are trimming expectations for the pace of future hikes. This could limit support for the yen, as a renewed rise in OIS pricing would strengthen the policy case for the currency.