Japan business sentiment improves in Q3

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Japan business sentiment improves in Q3

Japan's business sentiment has improved in the third quarter, the Bank of Japan's Tankan survey shows, indicating conditions for a sustainable economic revival are falling into place even as a global slowdown keeps policymakers cautious.

The sentiment of the biggest nonmanufacturers has brightened to levels unseen since 1991, when Japan's asset-inflation bubble began imploding. The sentiment shows that retailers have been benefiting from the lifting of pandemic-related restrictions earlier this year.

Companies also maintained their robust spending plans and faced a tight labor market, the survey shows,indicating that conditions for the Bank of Japan to phase out its massive stimulus program could fall into place.

The headline big manufacturers' confidence index rose to 9 in September from 5 in June, the BOJ's closely watched Tankan shows, surpassed market forecasts for a reading of 6 and marking the second straight quarter of improvement.

The tankan shows that the big nonmanufacturers index rose from 23 to 27, up from 23 and ahead of a median market forecast of 24 and improving for the sixth straight quarter. The highest reading since November 1991 was reached at a record high.

In a sign that wages may keep increasing, an index measuring companies' labor market views was the tightest since 2019 for big manufacturers and since 1992 for nonmanufacturers.

The survey shows that major manufacturers expect conditions to improve in the next few months, although slow global demand and signs of weakening China's economy are causing the outlook to be less positive.

The tankan is likely to be closely scrutinized by the BOJ policymakers to determine whether economic conditions are in place to start raising interest rates.

On the inflation outlook, companies expect prices to rise 2.0 percent, 2.2% three years from now and 2.0 percent five years, roughly unchanged from their projections three months ago.

In April-June, Japan's economy grew by an annualized 4.8% in the April-June quarter, as robust exports offset consumer weakness. However, analysts forecast a mild contraction in the July-September quarter as sluggish global demand weighs on exports.

With rising wages and higher inflation, the BOJ will be able to phase out its massive monetary stimulus with a focus on corporate earnings and business sentiment.