Japanese Business Confidence Rises Amid Manufacturing Slowdown

The Bank of Japan reported improved business confidence for the quarter ending in September, with the headline index for large manufacturers rising to +24 from +22 in June. While the index for large non-manufacturers dipped slightly to +35, the overall results suggest the Japanese economy is weathering impacts from conflict in the Middle East. Surveyed companies expect inflation to remain above the 2% target for several years, reaching 2.6% in three years and 2.5% in five years, which supports the case for further interest rate hikes following a September increase to a 31-year high.

Simultaneously, the S&P Global Japan Manufacturing Purchasing Managers' Index showed the manufacturing sector expanded at its slowest pace in six months. The index eased to 54.1 in September from 54.9 in August, though it marked the ninth consecutive month of growth. This slowdown resulted from weaker increases in output and new orders as clients adjusted inventories.

Despite the domestic slowdown, overseas demand remained strong, with new export orders rising for a ninth straight month due to sales in the United States and Asia. Employment grew at one of its fastest rates since 2018. Manufacturers continue to raise selling prices at one of the sharpest rates since late 2022, while industry sentiment remains optimistic due to demand for semiconductors and AI-related technology.