Japan business sentiment improves, Bank of Japan tankan shows

Japanese business confidence improved in the three months to September, according to the Bank of Japan's quarterly tankan survey, a reading that the central bank is likely to weigh as it considers the timing of its next interest rate increase.

The headline index measuring sentiment among large manufacturers rose to +24 in September from +22 in June, the survey showed. Economists had expected a reading of +25. An index tracking large non-manufacturers stood at +35, down from +37 in June and short of market forecasts of +36.

Firms told the survey they expect inflation to run at 2.6 per cent three years from now and 2.5 per cent five years from now, indicating that companies see price growth remaining above the Bank of Japan's 2 per cent target for an extended period.

The central bank raised interest rates to a 31-year high last month, with its governor signalling that it has entered a new phase focused on preventing inflation from overshooting its target and opening the door to further increases. The tankan results will feed into the Bank of Japan's quarterly growth and inflation forecasts due later this month, which are expected to offer clues on how soon another rate rise might come.

The reading suggests the Japanese economy has been absorbing the impact of the conflict in the Middle East, according to the survey's findings, though both gauges came in slightly below what analysts had forecast.