TOKYO: Sentiment among Japan’s large manufacturers improved for a second straight quarter, according to a closely watched Bank of Japan survey, making a rate hike by its central bank more likely.

The quarterly survey, called the “tankan,” showed the outlook among major manufacturers, the key so-called diffusion index, rose 1 point to plus 14 from the findings in June.

The survey is an indicator of companies foreseeing good conditions minus those feeling pessimistic.

The tankan for large manufacturers was plus 12 in March, marking the first drop in a year. Sentiment among large non-manufacturers was unchanged at plus 34, according to the latest tankan.

The relative optimism in the latest tankan reflects some relief over an agreement on tariffs with the US, reached in July.

The deal with the administration of President Donald Trump imposes a 15% tariff on most goods exported to the US Some goods face higher tariffs. Initially, the US imposed a 25% tariff on auto imports, so the latest deal is an improvement for Japanese automakers. It also increases certainty over US policy, at least for now.

However, the higher tariffs imposed on exports to the world's biggest market are still squeezing profits, wages, investment, and spending for many industries.

Kei Fujimoto, senior economist at SuMi Trust, said that despite the concerns about the tariffs’ impact on Japanese corporate earnings, the damage so far has been relatively limited.

Inbound tourism is also helping.

“We do not believe inbound-related demand from tourists has peaked. The number of tourists visiting Japan continues to show an upward trend,” he said.
The tankan findings could influence an upcoming decision by the Bank of Japan on interest rates. The BOJ has kept rates near zero for years to help stimulate consumer spending and business investment and counter weak demand that led to deflation.

But prices have risen above the central bank's target range of about 2%. The tankan shows the average inflation outlook for one year ahead was unchanged at 2.4%.

Analysts expect the Bank of Japan to raise its benchmark rate soon, but it’s unclear if it will do so at the next meeting later this month or later. The central bank raised its benchmark rate to 0.5% from 0.1% earlier this year.

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Japan's central bank survey shows an improved business sentiment