Japan business mood improves despite Middle East war, BOJ survey shows

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TOKYO, July 1 : Big Japanese manufacturers' sentiment improved in the three months to June to levels unseen since 2018, a closely watched survey showed on Wednesday, a sign the economy was weathering the energy shock from the Middle East conflict for now.

But companies expect business conditions to worsen three months ahead as they brace for rising costs and potential supply constraints from the war, the survey showed.

Corporate inflation expectations also heightened, the survey showed, highlighting broadening price pressures that may keep alive market expectations of further interest rate hikes.

The headline index measuring big manufacturers' business sentiment stood at +22 in June, up from +17 in March and exceeded a median market forecast for a reading of +16. It marked the highest level since March 2018.

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An index gauging big non-manufacturers' mood stood at +37, up from +36 in March. It beat a median market forecast for +35 to mark the highest level since August 1991.

While many companies complained of rising raw material costs from the Iran war, the negative impact was offset somewhat by brisk demand for AI-related goods and chips, a BOJ official told a briefing.

Some firms cited progress in passing on rising costs as a factor brightening their business outlook, the official said.

Big firms expect to increase capital expenditure by 11.5 per cent in the current fiscal year ending in March 2027, compared with a median market forecast for a 10.5 per cent gain.

The outcome will be among factors the BOJ will scrutinise at its next policy meeting on July 30-31. While the central bank is set to keep interest rates steady, its board will release fresh quarterly growth and inflation forecasts that will serve as a guide to the pace and timing of future rate increases.

The BOJ raised interest rates to a 31-year high in June in a landmark step in its policy normalisation, signalling readiness to tighten further as it focuses on taming price pressures from the Iran-war-induced energy shock.

The Middle East conflict has complicated the BOJ's policy path, stoking inflation through higher oil prices while squeezing an economy dependent on imported fuel.

While the peace deal between the U.S. and Iran eased market fears over global price pressures, wholesale inflation spiked to a three-year high of 6.3 per cent in May in a sign companies were already passing on higher costs from the energy shock.

Most firms replied to the tankan before the U.S.-Iran peace deal on June 15, the BOJ official said.

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