Japan’s service sector sentiment hits more than three-decade high

A woman in a kimono walks past a shop in a shopping district in Tokyo, Japan March 23, 2017. REUTERS/Kim Kyung-Hoon/File photo

TOKYO — Business sentiment among big Japanese non-manufacturers improved to a more than three-decade high in the first quarter, a closely watched central bank survey showed, offering policymakers hope that domestic demand will underpin a fragile economy.

But big manufacturers’ sentiment soured for the first time in four quarters due in part to auto production disruptions, according to the tankan survey released on Monday.

The outcome is among factors the Bank of Japan (BOJ) will scrutinize in its next meeting on April 25-26, when it issues fresh quarterly growth and inflation forecasts.

READ: Bank of Japan ends negative rates, closing era of radical policy

The April projections will draw market attention for any clues on how soon the BOJ could raise interest rates again, after having exited its massive stimulus program last month.

The headline sentiment index for big manufacturers stood at +11 in March from +13 in December, the Tankan survey showed, compared with a median market forecast for a +10 reading.

READ: Japan’s service activity surged in Jan on strong demand, weak yen

The index gauging big non-manufacturers’ sentiment improved to +34 in March from +32 three months ago, the survey showed, slightly exceeding a market forecast of a reading of +33.

It was the highest reading since August 1991, when Japan’s economy was booming from an asset-inflated bubble.

Both big manufacturers and non-manufacturers expect conditions to worsen three months ahead, the survey showed.

Big firms expect to increase capital expenditure by 4 percent in the fiscal year starting in April, against median forecasts of a 9.2-percent rise, the survey showed.

Japan’s economy expanded an annualized 0.4 percent in the final quarter of last year, narrowly averting a technical recession as robust capital expenditure offset weaknesses in consumption.

Analysts expect the economy to have barely grown in the first quarter as rising living costs hurt consumption, and output disruptions at some auto factories weighed on industrial production.

Business sentiment and corporate spending appetite are key to whether Japan’s economy can sustain a moderate recovery and allow the central bank to raise interest rates again.

Despite the BOJ’s decision to end negative rates last month, expectations that any further rate hikes by the BOJ will be slow in forthcoming have pressured the yen and briefly pushed it to a 34-year low against the dollar.