Japan's Central Bank Survey: Optimism Fuels Economic Growth

The Bank of Japan's (BOJ) latest "tankan" survey has painted a positive picture of the Japanese economy, with big non-manufacturers' sentiment improving and capital expenditure expected to increase. This optimism is a sign of the country's recovery despite global growth weakness and underscores the strength of domestic demand.

The tankan survey, released on October 1, showed that the sentiment index for big non-manufacturers stood at +34, up from +33 in June. This improvement reflects the return of tourism, both overseas and domestic, which had been hurt by the pandemic. Incoming travelers have recently outpaced pre-pandemic levels, driving optimism among non-manufacturing businesses.


Big companies expect to increase capital spending by 10.6% in the fiscal year to March 2025, the tankan showed. This projected increase in investment is smaller than a median forecast for a 11.9% gain but still indicates a commitment to growth and expansion. Capital expenditure continues to grow, despite soft demand in China and slowing U.S. growth, which clouds the outlook for the export-reliant country.


The BOJ will scrutinize the tankan survey in setting monetary policy and releasing fresh growth and inflation forecasts at its next meeting on October 30-31. The central bank ended negative interest rates in March and raised its short-term policy rate to 0.25% in July, aiming to keep inflation durably around its 2% target. The tankan's sentiment diffusion indexes will be among key factors influencing the BOJ's decisions.

Big manufacturers expect conditions to improve three months ahead, while non-manufacturers project conditions to worsen. This divergence in expectations highlights the differing impacts of global and domestic factors on various sectors. While manufacturers may be affected by global economic weakness, non-manufacturers benefit from the recovery in domestic demand.

The differing expectations between big manufacturers and non-manufacturers have implications for investment decisions and overall economic growth. As the BOJ considers these factors, it will need to balance monetary policy to support growth while maintaining its inflation target.

In conclusion, the BOJ's tankan survey underscores the optimism about Japan's economic growth, driven by the strength of domestic demand and increased capital expenditure. As the central bank considers these factors, it will need to navigate the differing expectations between manufacturers and non-manufacturers to maintain a balanced approach to monetary policy.