Business confidence among Japan’s largest manufacturers climbed to its highest point in more than six years during the three-month period ending in June, according to a widely followed survey released Wednesday — suggesting the country’s economy is holding up against the energy shock caused by the ongoing Middle East conflict.
Despite the encouraging numbers, companies are signaling they expect conditions to deteriorate over the next three months, citing rising costs and the possibility of supply disruptions tied to the war.
The survey also found that corporate expectations for inflation are growing, a development that could keep alive market speculation about additional interest rate increases by Japan’s central bank, the Bank of Japan, known as the BOJ.
The headline index tracking sentiment among large manufacturers came in at +22 in June, jumping from +17 in March and topping the median market forecast of +16. That reading marks the strongest level since March 2018.
A separate index measuring mood among large non-manufacturing companies registered +37, up from +36 in March, beating the median market forecast of +35 and reaching its highest point since August 1991.
While many businesses reported feeling the squeeze from higher raw material costs linked to the Iran war, a BOJ official told reporters at a briefing that strong demand for artificial intelligence-related products and semiconductor chips helped offset some of that pressure.
The official also noted that some companies pointed to progress in passing along their higher costs to customers as a reason for a more positive business outlook.
Large companies indicated they plan to boost capital spending by 11.5% during the current fiscal year, which runs through March 2027 — exceeding the median market forecast of a 10.5% increase.
These survey results will be among the data points the BOJ examines when its policymakers convene for their next meeting on July 30 and 31. While the central bank is widely expected to hold interest rates steady at that gathering, its board will release updated quarterly forecasts for economic growth and inflation that are expected to offer clues about the timing and pace of future rate hikes.
The BOJ raised interest rates to their highest level in 31 years back in June, a significant step in its effort to normalize monetary policy. The bank signaled it was prepared to tighten further as it works to contain price pressures fueled by the energy shock from the Iran war.
The Middle East conflict has made the BOJ’s policy decisions more complicated, pushing inflation higher through rising oil prices while also putting strain on an economy that relies heavily on imported fuel.
Although a peace agreement between the United States and Iran helped ease global market concerns about price pressures, wholesale inflation had already surged to a three-year high of 6.3% in May — a sign that businesses were already passing on elevated energy costs to buyers.
A BOJ official noted that most companies responded to the survey before the U.S.-Iran peace deal was reached on June 15.
