TOKYO – Confidence among a wide range of Japanese companies picked up in the fourth quarter, sending a positive signal to the Bank of Japan (BOJ) ahead of next week’s policy decision.

An index of sentiment among the country’s biggest manufacturers rose to 12 in December from nine three months earlier, the third straight gain, according to the BOJ’s quarterly Tankan report on Dec 13. The reading beat economists’ forecast of 10.

The business mood among the largest non-manufacturers also improved to 30 from 27, exceeding economists’ expectations and setting a fresh 32-year high. A positive figure means optimists outnumber pessimists.

The data showed sentiment picking up across the board, with an index for small manufacturers rising to one, turning positive for the first time since early 2019. The gauge for small non-manufacturers advanced to 14, beating estimates. 

The evidence of robust corporate sentiment will come as a welcome sign for the BOJ, as it boosts the likelihood that companies can continue to conduct the large wage hikes that the central bank hopes might feed into a positive wage-price cycle that would pave the way for normalising monetary policy.

“Today’s results, overall, show that the economy isn’t going to fall apart,” said chief economist Shinichiro Kobayashi at Mitsubishi UFJ Research and Consulting. “This Tankan is supportive for the BOJ to move towards normalisation, and I continue to expect the step in April after the bank confirms the results of spring wage negotiations.”

The Tankan survey showed that companies are generally maintaining their capital investment plans, with large firms across all industries saying they intend to increase such investment by 13.5 per cent in the current fiscal year, largely unchanged from their view three months ago.

“The capital spending plans are also solid,” Mr Kobayashi said. “There have been some companies that have become hesitant due to high material costs, but the Tankan shows they haven’t given up and will go ahead to invest.”

The data adds to signs that the economy will likely return to growth in the current quarter after a deep dip in the previous period. Gross domestic product contracted at an annualised pace of 2.9 per cent in the three months to end-September as households reined in spending, according to revised figures last week.

While the figures were broadly positive, they also underscored a continuing gap between various pockets of corporate Japan, with large firms generally more upbeat than their smaller counterparts, and non-manufacturers especially optimistic as the weak yen spurs inbound tourism, bolstering a wide swathe of the services sector.

The Tankan reflected mixed conditions in various industries. The easing chip shortage smoothed operations at automakers, lifting sentiment for that group to 28 from 15 in the prior period. Solid demand for semiconductors boosted the gauge for large electrical machinery makers to four from minus two previously. Medium-sized ceramics, stone and clay companies remained among the most bearish sectors, with small textile firms also negative.

In non-manufacturing, the reading for large firms in accommodation, eating and drinking services soared to 51, helped in part by strong demand associated with surging inbound tourism. The weak yen is a factor that helped boost the number of foreign visitors to about 2.52 million in October, surpassing the level of two years ago.

Dec 13’s survey showed that all companies on average forecast the dollar-yen to trade at 139.35 in the current fiscal year, compared with an estimated 135.75 three months ago. 

In recent weeks, market participants increasingly see the BOJ inching towards normalisation. While a Bloomberg survey of economists earlier in December found that most expected no tweaks to policy when the board meeting ends on Dec 19, two-thirds forecast that the authorities would scrap the negative rate by the end of April. Half said the move would happen that month.

Market chatter was fuelled last week when BOJ governor Kazuo Ueda said his job would become more challenging from the year end, and one of his deputies played down the potential impact that would result from a rate hike.

Still, officials see little need to rush as they have yet to see enough evidence of wage growth that would sustain inflation, according to people familiar with the matter. BLOOMBERG