Japan's factory mood hits highest in over five years on chip boom

The widespread rise in sentiment, particularly in the services sector, paints a picture of an economy robust enough to handle rising borrowing costs. Together with the tight labour market and ongoing cost pressures, this could bolster bets on additional BOJ rate hikes, potentially strengthening the yen. In equity markets, the solid performance of electronics and precision machinery firms underscores the chip-driven earnings narrative for Japanese technology and industrial stocks. The reluctance to pass on higher costs to consumers highlights that margin challenges persist.

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Japanese corporate sentiment has reached multi-year peaks, buoyed by semiconductors and service-sector strength, despite emerging headwinds from inflation and higher rates.

Summary:

• The Reuters Tankan manufacturing index climbed to +27 in November from +22, its best reading since August 2021.
• The non-manufacturing gauge jumped to +35 from +23, the strongest since June 2018.
• Electronics sentiment advanced to +39 from +25, driven by robust demand for memory chips, while precision machinery increased to +42 from +38.
• The services and other category more than doubled to +43 from +19, with companies pointing to a tight job market.
• Both sectors reported being weighed down by higher prices and rising interest rates.
• The February outlook shows manufacturers at +28 and non-manufacturers at +29.

According to the monthly Reuters Tankan survey, Japanese manufacturers' sentiment in November reached its highest point in over five years, fueled by surging chip demand, while non-manufacturers' confidence hit an eight-year high.

The manufacturing index increased to +27 from +22 in October, the highest since August 2021. The services index leaped to +35 from +23, a reading not seen since June 2018. This poll serves as a precursor to the Bank of Japan's quarterly Tankan survey. The survey was carried out between October 27 and November 6, with 214 out of 508 firms responding. The index is derived by subtracting the share of pessimistic respondents from optimistic ones; a positive number indicates net optimism.

Semiconductor firms and their suppliers spearheaded the manufacturing improvement. Electronics sentiment surged to +39 from +25, as one respondent called demand for semiconductors, especially memory chips, very strong. Precision machinery, covering some chip equipment manufacturers, rose to +42 from +38, supported by solid orders both domestically and internationally. A separate machinery company reported that semiconductor market shipments had hit record levels. Oil refining and ceramics increased to +25 from +14, and chemicals advanced to +33 from +27.

The service sector was equally optimistic. Information and communications confidence climbed to +29 from +8, powered by strong order books, while the services and other category more than doubled to +43 from +19. One manager noted that consistently tight labor conditions kept demand for workers elevated.

Not all was rosy. Companies across both sectors indicated that rising prices and higher borrowing costs were hurting business, and some found it hard to pass along higher expenses to clients.

For February, manufacturers anticipate a slight rise to +28, while non-manufacturers forecast a dip to +29, both still significantly above recent readings. For the BOJ, robust business sentiment, a tight job market, and cost pressures will factor into its policy considerations. The central bank's own quarterly Tankan survey will provide the next key update on corporate sentiment.