Japanese benchmark business sentiment rose over Q3 for the second straight quarter due to eased supply-side restrictions and slowing cost, and pass-through of cost increases despite growing uncertainty over global demand, the Bank of Japan's September Tankan business sentiment survey showed Monday.

The major manufacturer diffusion index (DI) – calculated by subtracting the percentage of companies reporting deteriorating business conditions from those reporting an improvement – stood at +9 in the September quarter, up from +5 in Q2, the highest level since June 2022. The BOJ projects the index to rise to +10 in Q4. A positive figure indicates the majority of firms see better business conditions.

Business sentiment among major non-manufacturers, mainly face-to-face services, also improved for the sixth straight quarter rising to +27 from +23 in June, as economic activity – including inbound tourists – resumed despite high costs. The BOJ expects the index to stand at +21 over Q4.

The sentiment index for smaller manufactures stood at -5, unchanged from Q2, however, the Tankan forecasts this to rise to -2 in Q4.

The sentiment index for smaller non-manufacturers stood at +12 in September, up from +11 in June – the sixth straight rise and the highest level since March 2019. The BOJ expects this to fall to +8 in Q4.

The Tankan also showed major- and smaller-firm capital investment plans remained strong despite high uncertainty and costs, supporting the BOJ's view that a virtuous cycle from profit to spending remained solid.

The BOJ expects major- firm investment plans this fiscal year, key to a pickup in domestic demand, to rise 13.6% y/y, revised up from the 13.4% projected in June's Tankan.

The Bank expects smaller-firm capex plans to rise 8% this fiscal year, revised up from 2.4% in June. The revised capex plans by major and smaller firms were above historical average levels – a closely watched BOJ metric.

SOLID INFLATION EXPECTATIONS

Both short- and medium-term inflation expectations at Japanese firms remained solid, while corporate output prices were largely unchanged, supporting the BOJ's view that Japan's stagnant price and wage economic norm has changed, according to the Tankan.

On average, companies saw the annual consumer inflation rate at 2.5% in September, slowing from 2.6% in June.

They also forecasted a rise of 2.2% three years ahead and a 2.1% rise in five years, both unchanged from June. The survey showed companies on average expect sales prices to rise 2.8% a year, down from 3% in June. Their three and five-year expectations remained unchanged at 3.8% and 4.4%.