Japan Business Sentiment Improves Slightly Amid Mixed Signals

By Megumi Fujikawa

TOKYO--Sentiment among large Japanese manufacturers improved slightly in the final quarter of the year as businesses weighed mixed signals, including a recovery in auto production and fears over a global economic slowdown.

The main index gauging sentiment among big manufacturers in the Bank of Japan's quarterly tankan corporate survey was +14, compared with +13 in the previous survey in September, according to data released Friday.

The figure exceeded the +12 expected in a poll of economists surveyed by data provider Quick. The index represents the percentage of companies that said business conditions were favorable minus those that said conditions were unfavorable.

The survey showed some positive signs that could bolster views that the central bank will soon raise interest rates.

Japanese companies plan to increase their capital spending by 11.3% in the fiscal year ending in March, compared with a 10.6% increase planned in the previous survey. That suggests they are more confident in their business outlook.

The gauge also showed that Japanese companies expect inflation to remain above the bank's target of 2%. Companies of all sizes expect overall prices to rise by 2.4% a year from now, unchanged from the forecast shown in the September survey.

BOJ Gov. Kazuo Ueda has said the bank will keep raising interest rates as long as the economy and prices move in line with the bank's projections.

Some economists expect the BOJ to raise its policy rate to 0.5% from 0.25% at its meeting next week. Others say the central bank will wait until January due to uncertainties surrounding the global economy, especially the impact of economic policies under President-elect Donald Trump.

"Even if Japan's economic and price moves are on track with the bank's outlook, and even if conditions in the U.S. are within expectations, it is also true that the BOJ is concerned about Trump-related risks, including the impact of the policies of the incoming Trump administration," said Daiwa Securities economist Mari Iwashita.

Economists at Nomura expect a December rate increase, but they say if the central bank does decide to skip a rate hike next week, the reason why will be telling.

In a research note, Kyohei Morita and Uichiro Nozaki said that if the BOJ decides to forgo a rate hike in December because of uncertainties or fiscal policy considerations, like increased momentum for fiscal support for households or the potential impact on how the government draws up its initial budget for 2025, they see good prospects for a rate hike in January.

"By contrast, if the BOJ decides to skip a rate hike in December not because of uncertainties but because it thinks [economic] fundamentals are not firm enough, we then see prospects of it skipping a rate hike in January too," they said, as the data that the central bank looks at is unlikely to show substantial changes from now until the first meeting of next year.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com