Key facts
- The Bank of Japan maintained its economic assessment for all nine regions.
- The BOJ stated that the likelihood of the Middle East conflict causing sharp declines in exports and output has receded.
- Many regions reported companies passing on rising costs through price increases at a faster pace.
- Big Japanese manufacturers' business sentiment improved to its highest level since March 2018.
- Companies expect business conditions to worsen in the next three months due to rising costs and potential supply constraints.
- Big firms plan to increase capital expenditure by 11.5% in the current fiscal year.
The Bank of Japan maintained its economic assessment for all nine regions on Thursday, indicating that the impact of the Middle East conflict on exports and output has diminished. In its quarterly report on Japan's regional economies, the BOJ noted that many companies are increasingly passing on rising costs through price increases at a faster pace than before.
Big Japanese manufacturers' business sentiment improved in the three months to June, reaching levels not seen since 2018, according to a closely watched survey. The headline index for big manufacturers stood at +22 in June, up from +17 in March. The index gauging big non-manufacturers' mood was +37, up from +35 in March.
Despite the improved sentiment, companies anticipate business conditions to worsen in the next three months as they prepare for rising costs and potential supply constraints stemming from the ongoing conflict. Corporate inflation expectations have also heightened, suggesting broadening price pressures that could support market expectations for further interest rate hikes.
A BOJ official mentioned that while many firms cited rising raw material costs due to the conflict, the negative impact was partially offset by strong demand for AI-related goods and chips. Some companies also noted progress in passing on costs as a factor improving their business outlook.
Big firms expect to increase capital expenditure by 11.5% in the current fiscal year ending March 2027, exceeding the median market forecast of a 10.5% gain. These findings will be considered by the BOJ at its upcoming policy meeting on July 30-31. Although the central bank is expected to keep interest rates steady, it will release updated quarterly growth and inflation forecasts that will guide future rate adjustments. The BOJ had previously raised interest rates to a 31-year high in June as part of its policy normalization efforts, signaling a readiness to tighten policy further to combat inflation driven by energy price shocks from the Middle East conflict.