Japan's business sentiment rises slightly

The Bank of Japan's latest "tankan" quarterly surve, shows a slight improvement in business sentiment among large manufacturers, with the headline index rising to +14 in December from +13 in September, marking the highest reading since March 2022. This exceeded market expectations of +12.

Major companies reported plans to increase capital expenditure by 11.3% in the fiscal year ending March, up from the 10.6% projected in September and surpassing market forecasts of 9.6%. The improvement was particularly notable in sectors such as automaking, fossil fuels, and machinery, while sentiment in service industries showed a slight decline.

The survey results come ahead of the Bank of Japan's crucial two-day policy meeting next week, where officials will consider whether to adjust the current 0.25% interest rate. However, the data's release appeared to dampen expectations of an immediate rate hike, causing the yen to weaken against the dollar, which traded at 152.90 yen, near a two-week high.

Despite Japan's economy growing at a revised 1.2% annual pace last quarter, supported by sustained consumer spending, challenges persist. A severe labor shortage remains a significant concern, with the employment sentiment index staying at negative 36. The retail sector showed a particularly sharp decline in sentiment, dropping to 13 from 28.

Prime Minister Shigeru Ishiba has proposed measures to boost consumer spending, including raising the basic tax-free income allowance and providing subsidies to low-income families. However, his minority government faces potential difficulties in implementing these initiatives due to possible political deadlocks.