Bank of Japan Tankan hits an eight-year high, and October's rate rise stays open

The Bank of Japan said on Thursday, October 1, that business conditions at large manufacturers rose to +24 from +22 in June, an eight-year high. The index, favorable replies minus unfavorable ones, is the highest since March 2018 after a sixth straight quarterly rise.

Large nonmanufacturers, the big firms that do not make goods, fell to +35 from +37. Analysts had expected +25 for large manufacturers and +36 for large nonmanufacturers, so each result was one point short.

Takahide Kiuchi, executive economist at Nomura Research Institute, wrote on Thursday that higher oil prices explain why the two groups moved apart. Large manufacturers have passed those costs on since spring, while large nonmanufacturers have found it harder to raise prices. He also pointed to demand for artificial intelligence and semiconductors as support for manufacturers.

On September 18 the board voted 7-2 to raise the overnight call rate, its key short-term rate, to around 1.25% from 1%. That is the highest that rate has been since 1995, and the new rate has been in place since September 24. The next meeting, on October 29 and 30, comes six weeks after the increase.

In the June survey, these firms had expected a weaker September than the one that arrived. Large manufacturers had expected +17, and the result was +24. Large nonmanufacturers had expected +28, and the result was +35.

They expect December to be weaker. Large manufacturers put the index at +21 by then, and large nonmanufacturers at +30, down from +35.

Spending plans carry the same split. Large manufacturers revised up their plans for buildings, equipment and land by 1.3 percentage points, to an 11.6% increase in the year ending March 2027, while large nonmanufacturers revised theirs down by 1 percentage point, to 11.2%. For large firms in all industries, the plan is still an 11.3% rise, little changed from 11.5% in June.

In those plans, firms assume 154.23 yen per dollar for the year, compared with 152.57 in June. On Thursday the dollar traded near 158.09 yen, so the plans still assume a stronger yen than the market, because they use fewer yen per dollar.

Firms across industries expect overall prices to rise 2.6% a year ahead, 2.6% three years ahead and 2.5% five years ahead, all above the bank's 2% target. The one-year and five-year figures were slightly lower than in June, and the three-year figure was unchanged.

On September 30, the day before those figures came out, Mari Iwashita, executive rates strategist at Nomura Securities, said the key would be how much the bank revises up its inflation forecasts for the year ending March 2028, and how far it pushes back the timing of the inflation peak.

The October meeting

Thursday morning the bank published a summary of opinions from the September meeting. One member said, "If signs of an upward deviation in prices are observed, the Bank will need to accelerate the pace of rate hikes."

Another opinion in that summary said it was desirable to hold the rate at the September meeting.

On September 30, the day before the survey, three people familiar with the bank's thinking said an October increase faces a high hurdle, and becomes an option only if an outside shock raises the risk of a sharp jump in prices. Governor Kazuo Ueda has said a second increase in a row would need that kind of price risk, or inflation already above the 2% target. He has also said the bank is ready to act early, rather than be forced into a more extreme step.

Kazuo Momma, a former executive director at the bank, said on September 25 that he would put the chance of increases at two meetings in a row at around 20% to 30%.

The board meets on October 29 and 30 to decide whether to raise the rate again.