The Bank of Japan's quarterly Tankan business survey showed confidence among manufacturers was flat with a faintly brighter tone in the December quarter, led by a sharp improvement for oil refineries and thanks to strong global demand for semiconductor-producing equipment and other machinery. The Tankan diffusion index showing sentiment among major manufacturers edged up to 14 (vs. consensus 12) from 13 in September while that for smaller manufacturers picked up to 1 from 0, beating the median economist forecast of -1. Resumed output of some Toyota models after suspension over safety check concerns failed to give a boost to sentiment in the auto industry amid slowing demand from the United States. Steel mills turned bearish in tandem with China's slow recovery from the pandemic slump and property market woes.

Sentiment among non-manufacturers was mixed. The index measuring sentiment among major non-manufacturers slipped back to 33 from 34 while the index for smaller non-manufacturers rose to 16 from 14. A sharp drop was reported by major retail chains as the lingering heat wave dampened demand for fall and winter clothing as well as other seasonal goods. By contrast, telecommunications industry turned slightly more bullish. Large hotels and restaurants saw their sentiment slump while their smaller counterparts felt business was better than three months earlier.

Major firms projected their plans for business investment in equipment would rise a combined 11.3 on year, in fiscal 2024 ending on March 31, 2025, up from 10.6% projected in September and coming in higher than the consensus forecast of a 9.8% increase. Capex plans are generally supported by demand for automation amid labor shortages as well as government-led digital transformation and emission control. Smaller firms raised their combined capital spending plans to a 4.0% increase from a 2.6% gain seen three months ago but it was below the median economist call of a 5.3% rise. Smaller firms tend to have conservative plans at the start of each fiscal year and revise them up later.

While near-term inflation expectations are anchored around the Bank of Japan's 2% price stability target, many firms continue to project a slight downward pressure in general prices (as opposed to just business costs) in the longer term, indication that the pace of high wage hikes may lose some steam and a spike in the prices for food, energy and other necessities are set to ease off. Major manufacturers on average forecast an annual inflation rate of 2.0% a year from now (2.0% in the previous survey), 1.8% in three years (1.8%) and 1.7% in five years (1.8%). Large non-manufacturers expect inflation at 2.0% in a year (1.9% previously), 1.8% in three years (1.7%) and 1.7% in five years (1.6%). Smaller firms continued to expect a higher rate of inflation around 2.5% 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 Dec. 18-19, when the board will discuss the timing for a further rate hike. The bank has been in the process of gradually normalizing its policy since it delivered its first rate hike in 17 years in March.

The Bank of Japan's quarterly Tankan business survey is forecast to show confidence among major manufacturers remained stagnant in the December quarter. Resumed output of some Toyota models after suspension over safety check concerns have propped up the auto industry while strong global chip demand is supporting makers of semiconductor-producing equipment. By contrast, steel mills and some machinery industries suffered from China's slow recovery from the pandemic slump and property market woes. Sentiment among non-manufacturers appears to have dipped as the heat wave lingered well into the middle of the fall, dampening demand for fall and winter clothing and offsetting inbound-driven demand for hotels and restaurants.

The Tankan diffusion index showing sentiment among major manufacturers is forecast at 12, down slightly from 13 in September. The index measuring sentiment among major non-manufacturers is seen at 33, easing from 34 in the previous poll.

Major firms are expected to project their plans for business investment in equipment would rise a combined 9.8% on the year in fiscal 2024 ending on March 31, 2025, maintaining the solid pace but revising down slightly from +10.6% in the September survey and +11.1% in June. Capex plans are generally supported by demand for automation amid labor shortages as well as government-led digital transformation and emission control. Smaller firms are expected to raise their combined capital spending plans to a 5.3% increase after lifting it to a 2.6% gain in September from a 0.8% projection in June. Smaller firms tend to have conservative plans at the start of each fiscal year and revise them up later.

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.