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Saturday, Dec. 16, 2006
'Tankan' rise fuels rate hike talk
Business confidence at large manufacturers rose slightly in the three months to December, according to the Bank of Japan's quarterly "tankan" survey released Friday, fueling speculation the central bank's second interest rate hike in about six years could come next month.
The BOJ said business sentiment for large manufacturers rose for three straight quarters to 25 from 24 in September, which is the highest since the index hit 26 in September 2004.
But small and large companies were less confident about the upcoming January-March quarter. Sentiment at large manufacturers dropped to 22 for the quarter, while that for small and midsize companies dipped to 5.
The tankan represents the gap between companies reporting favorable business conditions and those reporting the opposite.
The October-December improvement was driven by the iron and steel, nonferrous metals, real estate and information services sectors, it said.
The outcome boosted the stock market, sending the 225-issue Nikkei stock average to a seven-month high of 16,914.31.
Market watchers generally agree that the BOJ will not raise interest rates at its Policy Board meeting next week, but now think it is more likely to do so in January.
"I think the BOJ will raise the interest rate in January if the BOJ maintains its assessment that the economy is expanding," said Norio Miyagawa, an economist at Shinko Research Institute. "There is no way this tankan will affect negatively to that end."
Makoto Ishikawa, a senior economist at Japan Research Institute, agreed, saying the BOJ is likely to raise interest rates between January and March, when the current fiscal year ends.
Although most economists predicted the figure for large manufacturers would be strong, Ishikawa said he was surprised the figures for small and midsize companies were strong as well.
"Until now, it was believed that large companies were the ones pushing up the figures and were at the core of the economic recovery," Ishikawa said. "But the tankan showed that the positive effect of those companies has spread to smaller firms as well."
Business sentiment for midsize and small manufacturers improved to 10 from 6 in September, and to minus 6 from minus 8 for midsize and small nonmanufacturers.
These figures and other economic indicators, including an inventory index for the information and technology sector, are fueling anticipation of an interest rate hike next month, Ishikawa said.
In the meantime, market watchers will be waiting for the outcome of the BOJ's next Policy Board meeting starting Monday. BOJ Gov. Toshihiko Fukui will hold a news conference Tuesday after the meeting ends.
The employment index for all industries, which represents the gap between surplus and shortage of employment, was minus 10, meaning companies are short of personnel and are likely to hire more.
The BOJ conducted the survey from Nov. 10 to Dec. 14, covering about 10,000 companies.
Early '07 rate hike?
Some two-thirds of 22 economists at private banks and think tanks expect the Bank of Japan to raise its key interest rate in the January-March period next year, according to a Kyodo News survey released Thursday.
The Tuesday-Wednesday poll found 14 percent expected a rate hike by the central bank in the first quarter of 2007, up from 10 in the previous survey in early November.
In contrast, four replied that the BOJ is likely to decide on a hike in the unsecured overnight call money rate by year's end, down from seven.
Many respondents said the possibility of a rate increase in the remaining part of this year has weakened due to sluggish consumer spending and unfavorable economic data released recently.
Seiji Adachi, a senior economist at Deutsche Securities Ltd., said the BOJ will decide whether to raise the rate by analyzing data to be released at the end of December.
A rate hike "may be delayed into 2008 or thereafter" if a global economic slowdown is confirmed in the absence of favorable data by the end of January, Adachi added.