Japan business sentiment hits 11-year high

Business confidence among Japan’s big manufacturers improved for the fifth straight quarter in the three months through December as global economic sentiment picked up, according to the Bank of Japan’s quarterly Tankan survey, released on Friday.

The key index for large manufacturers’ sentiment stood at 25 in December, up 3 points from the September survey’s 22 and hitting its highest level since December 2006 when the index marked 25.

The index is calculated by subtracting the percentage share of enterprises responding “unfavourable” from those responding “favourable.” The Tankan survey was conducted from Nov. 14 to Dec. 14, and surveyed 10,645 companies.

This is the longest streak of positive business sentiment since the March 2013 survey through the March 2014 survey, the last time corporate sentiment improved for five quarters in a row. With the global economic expansion underpinning exports and corporate profits, sentiment has been boosted at both small and large firms. Small manufacturers’ sentiment rose from 10 to 15, while that of small non-manufacturers rose from 8 to 11. Both of these figures were the highest since 1991.

A better-than-expected improvement in sentiment – most striking among small firms – underlined solid growth momentum, according to Bloomberg Economics’ Yuki Masujima. The drivers, a weak yen and stronger external demand, are fuelling the profits of big manufacturers. Buoyed by a favourable outlook, firms say they plan on average to boost capital spending by 10.2 percent year-on-year, according to the survey.

“Companies that are more upbeat on business conditions are more likely to increase wages. If that’s not incentive enough, a tightening labour market may eventually force their hand, as they compete for scarce workers – the Tankan showed the labour shortage grew even more severe.”

Sources: BOJ, Nikkei Asian Review, Bloomberg