Japanese Business Sentiment Remains Unchanged as Expected

Japanese companies remained optimistic about business conditions in June from three months ago, a Bank of Japan corporate survey showed on Monday, underscoring widespread views that the Bank of Japan could raise interest rates as early as August.

The yen fell to a session low of 123.28 to the U.S. dollar after the BOJ's quarterly tankan business sentiment survey came largely in line with forecasts, compared with around 123.05 just before it was released. Japanese government bond futures hit a three-week high of 132.20, up 0.19 point.

The BOJ's closely watched tankan, meaning short-term economic outlook, showed a headline diffusion index (DI) for big manufacturers' sentiment of plus 23.

That matched the market's median forecast and was unchanged from the previous survey in March.

"The figures were largely in line with the consensus," said Takeshi Minami, chief economist at Norinchukin Research Institute. "This shows that underlying domestic economy stays strong as big manufacturers' DI was above 20.

"We are expecting the Bank of Japan to tighten credit in August, but we still need to see the outcome of the next industrial output figures and the GDP data," he said, adding that a slightly weaker than expected reading for small manufacturers is a cause for concern.

The tankan followed a mixed batch of economic indicators released last week that pointed to firmness in job conditions and household spending, while showing tame inflation and a slump in industrial production.

The diffusion index is calculated by subtracting the percentage of companies that consider conditions to be unfavourable from those that see them as favourable. A positive number means optimists outnumber pessimists.

The tankan also showed big firms expect their capital spending to rise 7.7% in the current fiscal year ending next March.

That was lower than the market's median forecast for a 8.8% rise but was up from the 2.9% increase seen in the previous survey.

Market players have been eagerly awaiting the June tankan for clues on whether the BOJ will raise rates to a 12-year high of 0.75% in August, as widely expected by markets.

Traders were also focusing on capital spending plans by Japanese firms in gauging the strength of the corporate sector, a key driver of the world's second-largest economy.

The index for big non-manufacturers stood at plus 22, matching the consensus forecast and unchanged from three months ago.

Big manufacturers' outlook index for September was seen at plus 22, showing that they expect business conditions to worsen slightly over the next three months.

The outlook index for big non-manufacturers stood at plus 23.

The survey covered 10,839 companies, of which 2,469 were categorized as large. It was conducted from May 28 to June 29.

Many analysts expect the BOJ policy board to keep policy unchanged at its next meeting on July 11-12.

The central bank has kept interest rates on hold after raising the key policy rate to 0.5% in February, which was the first rate hike since July last year.