Tokyo: Confidence among Japan’s large manufacturers rose from three months earlier, leaving the door open for the Bank of Japan (BoJ) to consider an interest rate hike later this month.

An index of sentiment among the country’s biggest manufacturers climbed to 13 in June from 11 in March, according to the BoJ’s quarterly Tankan report yesterday. Economists had forecast it would be unchanged.

The index for large non-manufacturers edged lower to 33 from 34, which was the highest level since 1991.

The Tankan is among key data releases ahead of the BoJ’s next policy meeting at the end of the month. One in three economists surveyed by Bloomberg expects a rate hike at that gathering.

The yen dropped to the lowest level since 1986 last week, prompting some analysts to flag a heightened risk of a rate move as governor Kazuo Ueda has pledged to watch the yen’s impact on inflation closely.

“The Tankan helps keep a July hike on the table, as business sentiment came in robust and inflation expectations stayed high,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.

Yesterday’s data reflected resilience across most sectors and included an upward revision to capital spending plans for this fiscal year to 11.1% growth.

The textiles gauge rose to 22 from 11, leading manufacturing gains, while machinery makers also posted solid gains. Autos slipped a bit, after a new safety-certification scandal emerged.

“The new scandal in the auto sector was likely priced in so that’s why the auto sector saw sentiment slightly worsening but that shows the new scandal isn’t expected to be as large as a previous one,” Maruyama said.

Among services, communications led gainers while retailing fell to 19 from 31 in a sign that consumer spending is weakening in the face of inflation.

Yesterday’s data showed inflation expectations, a key driver for price growth, rose slightly across longer-term time frames.

While the one-year projection for general price growth stayed at 2.4%, the three-year forecast was raised to 2.3% and the five-year annual rate outlook raised to 2.2%.

Bloomberg economist Taro Kimura said: “The signals in the BoJ’s Tankan survey support the case for another rate hike, which we expect the BoJ to deliver at its July meeting.

“Inflation-related gauges show more corporates are planning to raise prices and see consumer-price gains staying above the 2% target over the longer run.”

Respondents to the survey lowered their financial year forecasts for the yen, with Japan’s currency now seen averaging 144.77 per US dollar. The currency was trading around 160.80 yesterday morning in Tokyo after sliding as low as 161.27 late last week, the weakest since 1986.

The feeble yen is having mixed effects on sentiment in Japan. It has helped exporters secure record-high profits and attracted record numbers of foreign tourists to the benefit of regional economies and retailers.

At the same time, small companies and households have struggled to cope with higher import costs for raw materials, fuel and food. Increasingly, executives have cited its adverse effects.

Even with the slight decline, the mood among service sectors remains robust. The number of foreign visitors climbed to the highest for the month of May by rising 60% from a year earlier, according to Japan National Tourism Organisation, helping firms from restaurants to hotels.

Still, there are reasons for caution. The government revised gross domestic product for the first quarter sharply lower yesterday, saying the annualised contraction is now seen at 2.9% instead of the previous 1.8%, after construction-industry data were revised.

“The mixed data places the BoJ in a tough spot to make the call” on rates, Maruyama said.

 - Bloomberg