BOJ Tankan: Large Manufacturers at 8.5-Year High; October Rate Hike Bets Fade

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In the Bank of Japan's September Tankan survey, the business conditions diffusion index for large manufacturers improved by 2 points from the previous survey, reaching its highest level since March 2018. The non-manufacturing index worsened by 2 points but remained at a high level, underscoring the resilience of the corporate sector. Firms' inflation expectations stood at 2.6% one year ahead, 2.6% three years ahead, and 2.5% five years ahead, holding above 2% even as they stayed flat to slightly lower. Many in the market see a December rate hike as the main scenario, and expectations for a consecutive hike at the October meeting have receded somewhat, with bond market pricing for an October hike falling from around 30% at the end of last week to around 20% shortly after noon on the day. Meanwhile, Tokyo Shoko Research analyzed 321,953 small and medium-sized companies that carried interest-bearing debt in 2025 and found that if funding rates and lending rates both rose by 0.50 percentage points, average ordinary profit would fall by about 1.8%, and the share of loss-making companies would rise from 27.7% to 29.4%; a 0.75-point rise would push that share to 30.2%. Maruyama Rinto, senior rates and foreign exchange strategist at SMBC Nikko Securities, said the content supports the BOJ's rate-hike path, but it is hard to imagine the situation is so urgent that the bank cannot wait until December.

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