AI demand is expected to improve business sentiment, while rising prices are expected to be a headwind for private consumption. Based on the Bank of Japan's September Tankan survey, the outlook indicates that business sentiment will diverge between the manufacturing and non-manufacturing sectors.
Regarding the outlook for the September Tankan survey, which the Bank of Japan will release on 1 October, AI demand and semiconductor-related demand are expected to lift sentiment in the manufacturing sector, while higher crude oil prices are expected to drive greater pass-through of costs by companies. The current conditions DI for large manufacturers is expected to improve by approximately 4 points from the previous survey, while the current conditions DI for large non-manufacturers is expected to deteriorate by approximately 1 point.
However, private consumption remains weak in underlying terms as inflation runs higher than expected. It has been pointed out that, particularly in the non-manufacturing sector, passing on higher electricity and fuel costs is difficult, making business sentiment more vulnerable to downside pressure.
Accelerating price increases for consumer goods raise concerns that weaker demand for domestic travel, slowing inbound demand and the effects of torrential rain disasters in western Japan could lead to deteriorating sentiment in accommodation and food services and the retail sector.
Ahead of the release of the Tankan survey, progress in passing on higher costs and trends in private consumption are expected to become the key determinants of business sentiment.