Japanese Business Sentiment Mixed, Rate View Steady

Japan's big manufacturers remained upbeat about business in September, a Bank of Japan survey showed on Monday, but the mood among non-manufacturers and smaller firms weakened, prompting concerns about the outlook amid a global market shakeout and fears of a U.S. slowdown.

But the mixed data did little to alter the view that the BOJ could still raise interest rates by the end of the year.

The BOJ's tankan, meaning short-term economic outlook, showed a headline diffusion index (DI) for big manufacturers' sentiment of plus 23, unchanged from the June survey and beating the market's median forecast of plus 22.

But the indexes for the other five categories of manufacturer and non-manufacturer all fell from June.

"Among large manufacturers, exporters' confidence rose, which is consistent with strong exports this summer and the rebound in industrial production," said Kiichi Murashima, director of economic and market analysis at Nikko Citigroup. "But small firms and non-manufacturers are still suffering from the weakness in private consumption and a lack of pricing power."

The tankan was eagerly awaited by market players, who are trying to gauge the impact on Japanese business sentiment of the recent market turbulence, sparked by a growing number of defaults in U.S. subprime mortgages.

The survey followed a mixed batch of economic indicators released last week that showed a solid rebound in production and rising exports but also a rise in the jobless rate.

Japanese government bond futures opened down 0.19 point at 134.75 after the tankan's headline figure beat expectations, but then turned positive. The yen edged up against the U.S. dollar compared with around 114.90 before the data release.

The global market shakeup resulted in a higher yen and a slide in Japanese stock prices, which was expected to dampen companies' business outlooks. The diffusion indexes are calculated by subtracting the percentage of companies that consider conditions to be unfavourable from those that see them as favorable. A positive number means optimists outnumber pessimists.

The tankan also showed big firms expect their capital spending to rise 8.7% in the current fiscal year ending next March, beating the market's median forecast of a 7.5% gain and up from the 7.7% climb seen in the June survey.

"Overall, the tankan figures aren't that bad. The results are supportive for a BOJ rate hike, although we expect the central bank to wait until January-March next year to raise rates," said Seiji Adachi, senior economist at Deutsche Securities.

The overall index for big non-manufacturers stood at plus 20, below the consensus forecast and down from plus 22 in June.

For small firms, the manufacturers' index stood at 1 in September, down from 6 in June, while that of non-manufacturers deteriorated to minus 10 from minus 7 in June.

Big manufacturers' outlook index for December was seen at plus 19, showing that they expect business conditions to worsen over the next three months.

The outlook index for big non-manufacturers stood at plus 21.

The survey covered 10,750 companies, including 2,459 large businesses. It was conducted from Aug. 28 to Sept. 28.

Swap contracts on the overnight call rate showed investors see a roughly 55% chance of the BOJ raising rates to 0.75% from the current 0.5% in December, little changed from last week.

Economists point to a possible slowdown in the U.S. economy, Japan's biggest export destination, as a risk factor in the outlook for the Japanese economy.

The BOJ policy board meets next on Oct. 10-11.

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.