The Bank of Japan's quarterly Tankan business survey showed confidence among major manufacturers was flat in the September quarter, hit by sluggish demand in China that is still reeling from its property market woes and despite solid global demand for semiconductors. The Tankan diffusion index showing sentiment among major manufacturers stood at 13, unchanged from June. It was just below the median economist forecast of 14. Sharp deterioration in sentiment was reported by oil refineries and lumber/wood producers, which offset modest improvement among manufacturers of consumer electronics, computers and smartphones as well as those of metal products.

By contrast, the index measuring sentiment among major non-manufacturers improved slightly to 34 from 33 seen three months earlier, coming in better than the consensus call of 32. Improvement among retailers and construction firms was largely offset by gloomier views among providers of services to individuals and telecom firms.

Major firms projected their plans for business investment in equipment would rise a combined 10.6 percent on year, below consensus of 11.9 percent, in fiscal 2024 ending on March 31, 2025, somewhat maintaining the solid pace after jacking them up to a 11.1 percent increase in the June survey from a cautious 4.0 percent gain projected in March.

Smaller firms raised their combined capital spending plans to an impressive 2.6 percent increase, as expected, after projecting a 0.8 percent drop in June, which was still up from a 3.6 percent dip planned in March. Smaller firms tend to have conservative plans at the start of each fiscal year and revise them up later. Capex plans are generally supported by demand for automation amid labor shortages as well as government-led digital transformation and emission control.

Major manufacturers on average forecast an annual inflation rate of 2.0 percent a year from now (2.1 percent in the previous survey), 1.8 percent in three years (1.8 percent) and 1.8 percent in five years (1.7%). Large non-manufacturers expect inflation at 1.9 percent in a year (2.0 percent previously), 1.7 percent in three years (1.8 percent) and 1.6 percent in five years (1.6 percent). Smaller firms expect a higher rate of inflation around 2.5 percent in all timeframes, feeling the burden of high materials and labor costs.

BOJ policymakers will analyze this and other pieces of data ahead of their next policy meeting on Oct. 30-31, when the board will discuss the need to raise interest rates further and update their medium-term growth and inflation forecasts. The bank has been in the process of gradually normalizing its policy since it conducting its first rate hike in 17 years in March.

The BOJ Tankan was conducted from Aug. 27 until Sept. 30. Many firms are believed to have returned their responses by mid-September, when the yen had already appreciated close to ¥140 to the dollar from around ¥147. The diffusion index is calculated by subtracting the percentage of companies reporting deteriorating business conditions from the percentage of those reporting an improvement. A positive figure indicates the majority of firms see better business conditions.

The Bank of Japan's quarterly Tankan business survey is forecast to show confidence among major manufacturers stagnated in the September quarter, hit by limping exports, particularly to China still reeling from its property market woes, and despite solid global demand for semiconductors. Non-manufacturers including restaurants, hotels and retailers continued suffering from chronic labor shortages, which have mitigated the uplifting effects of strong inbound spending.

The Tankan diffusion index showing sentiment among major manufacturers is forecast at 14, little changed from 13 in June. The index measuring sentiment among major non-manufacturers is seen at 32, down slightly from 33 the previous three months earlier.

Major firms are expected to project their plans for business investment in equipment would rise a combined 11.9 percent on the year in fiscal 2024 ending on March 31, 2025, maintaining the solid pace after jacking them up to a 11.1 percent increase in the June survey from a cautious 4.0 percent gain projected in March. Capex plans are generally supported by demand for automation amid labor shortages as well as government-led digital transformation and emission control.

The Tankan survey, which is conducted quarterly by the Bank of Japan, is considered the most complete reading of Japan's economic performance. The Tankan surveys individual components of the economy such as large and small manufacturing and nonmanufacturing enterprises. A key component of the survey deals with capital expenditures (CAPEX) going forward.

The Bank of Japan's Tankan survey is considered one of the most important indicators of the economy's health and helps the Bank of Japan determine monetary policy. It is widely used by investors to determine future investments in Japan. Firms are asked questions that cover a wide range of topics including the future direction of capital expenditure and pricing as well as the corporate outlook towards employment and the overall economy.

The data are broken down by large, medium and small manufacturers as well as the non-manufacturing sectors. A key number to watch is the all industries capital expenditure or CAPEX measures capital expenditure by all Japanese industries except the financial industry. The large manufacturers' index reflects the large international companies while the small manufacturers' index is reflects the domestic economy.