–BOJ Tankan Survey to Show AI Boom Lifting Manufacturer Sentiment, High Costs Making Services Sector Slightly Less Confident
By Max Sato
(MaceNews) – Behind the Bank of Japan’s accelerated pace of interest rate increases this month were creeping upside risks to inflation as the lingering Iran war and the stubbornly weak yen threaten to keep energy, materials and import costs high. That can be confirmed in the September Tokyo CPI, which is released a few weeks ahead of the national average data.
All three key consumer inflation measures for the central Tokyo area due on Oct. 2 are forecast to be above the BOJ’s 2% inflation target after staying at or just below 2% for several months. BOJ board members are concerned that high energy costs will spread to a wide range of goods and services at a time when firms are also passing higher labor costs to consumers.
When BOJ officials check the pulse of economic growth and inflation, they closely monitor three main risk factors: the impact of the Mideast conflict, strong global demand to develop artificial intelligence, and fluctuations in foreign exchange rates. AI projects have been squeezing the supply of materials and resources, causing the prices of computers, smartphones and other electronics to soar.
At the same time, the AI boom has been supporting exports, industrial production, capital investment and business confidence in general, which will be seen in the August production data on Sept. 30 and in the BOJ’s Tankan business survey for the September quarter on Oct. 1. The focus is also on how the BOJ’s rate hikes and globally rising long-term bond yields are affecting financial conditions of the surveyed firms.
While the weak yen is eroding Japan’s purchasing power, it has been prompting visitors from other countries to spend more in Japan. That provides some support to August retail sales due on Sept. 30 but severe rainstorms caused flooding and mudslides last month and lingered into this month, hurting economic activity in some regions.
Tuesday, Sept. 29
TBA – The Cabinet Office releases the government’s monthly economic report for September. Officials are expected to maintain their overall economic assessment. The August report was released at around 1630 JST on Aug. 27 (0730 GMT/0330 EDT the same day).
Last month, the government projected that moderate economic recovery would continue in the near term, downplaying lackluster GDP growth in the April-June quarter, but also warned that high energy costs amid the Iran war could push up overall inflation and that last month’s deadly earthquake in the southwestern region could dampen growth. It maintained its overview, saying that the economy was “recovering at a moderate pace but the impact of the situation in the Middle East and natural disasters needs a close attention.”
As for the near-term outlook, the government repeated, “The improvement in the employment and income conditions and the effects of various (fiscal) policies are expected to support a moderate recovery while the impact of the situation in the Middle East and natural disasters needs a close watch.”
Wednesday, Sept. 30
0850 JST (2350 GMT/1950 EDT Tuesday, Sept. 29) The Ministry of Economy, Trade and Industry releases preliminary August industrial output, the outlook for September, October.
Mace News median: +1.7% m/m (range: +0.3% to +2.0%) vs. July revised to -0.2% from +0.1%; +7.0% y/y (range: +5.6% to +7.4%) vs. July revised to +3.9% from +4.1%
Japan’s industrial production is expected to rebound a solid 1.7% on the month in August, backed by global demand for memory chips used in artificial intelligence development and domestic demand for computers in a widespread digitization move. Production posted its first drop in four months in July (revised down to -0.2% from +0.1%).
Last month, the monthly survey by the Ministry of Economy, Trade and Industry indicated that output would rise a solid 3.1% on the month in August (adjusted for the statistics’ upward bias), led by chip-making equipment, computers and vehicles. Production was forecast to slip back 4.2% in September.
The ministry has maintained its assessment that industrial output was “taking one step forward and one step back.” The last change was made in the July 2024 report, when it upgraded its view.
From a year earlier, production is forecast to mark its third consecutive increase, up 7.0%, after rising a downwardly revised 3.9% in July.
Wednesday, Sept. 30
0850 JST (2350 GMT/1950 EDT Tuesday, Sept. 29) The Ministry of Economy, Trade and Industry releases preliminary August retail sales.
Mace News median: +2.7% y/y (range: +1.2% to +3.7%) vs. July revised to +3.7% from +4.0%; -0.9% m/m (range: -1.6% to -0.8%) vs. July revised to +2.1% from +2.4%
Japanese retail sales are forecast to post their sixth straight year-on-year rise in August but its pace is seen slowing to 2.7% from a downwardly revised 3.7% in July amid bad weather. Massive rain storms caused casualties and damage to many homes in Chiba, east of Tokyo, dampening foot traffic at department stores and supermarkets in the prefecture.
Sales of fuels remain depressed as their prices have been restrained by subsides aimed at easing the pain of high costs triggered by the Mideast conflict. On the bright side, there is solid demand for drugs and cosmetics from both domestic consumers and overseas visitors.
Last month, the Ministry of Economy, Trade and Industry maintained its assessment after upgrading it in the May report, saying retail sales are “on an uptrend.”
On the month, retail sales are forecast to slip back 0.9% after rebounding a downwardly revised 2.1% in July on a 3.9% slump in June, which was the first drop in four months.
Industry data showed department store sales posted their eighth straight year-on-year rise in August but stormy weather slowed the pace of increase to 2.6% after hot and sunny days boosted demand for seasonal goods and lifted July sales 5.1% above year-earlier levels from a 2.3% gain in June. Persistent demand from affluent customers for luxury bags and wristwatches partly offset the drag from heavy rains and typhoons while summer holiday gifts and holidays also supported overall sales.
Sales to visitors from overseas marked their sixth consecutive increase in August, up 4.6%, slowing from a 25.5% rise in July. Tourists from Taiwan, Hong Kong and South Korea continued to lead the gain. Spending by shoppers from mainland China slumped 17.5% after rising about 5% in July. Many of them are bypassing Japan at the request of Beijing over bilateral diplomatic rows.
Thursday, Oct. 1
0850 JST (2350 GMT/1950 EDT Wednesday, Sept. 30) The Bank of Japan releases the September quarter Tankan business survey.
Mace News medians: large mfg sentiment +25 vs. +22 in June; large non-mfg +36 vs. +37 in June; small mfg +11 vs. +9 in June; small non-mfg +14 vs. +15 in June.
FY2026 large firm capex plans +12.1% y/y (+11.7% to +12.8%) vs. +11.5% in June; FY2026 small firm capex plans -4.8% (-6.9% to -2.8%) vs. -8.3% in June.
The Bank of Japan’s quarterly Tankan business sentiment survey is expected to show sentiment among large manufacturers rose to a nine-year high in the September quarter after posting an unexpected pickup in June, thanks to strong global demand for memory chips and equipment to produce them used in artificial intelligence projects.
By contrast, large non-manufacturer sentiment is seen slipping back slightly under the weight of rising energy, import and labor costs as well as gradually rising borrowing costs following BOJ rate hikes. While hotels, restaurants and retailers benefit from solid sending by visitors from overseas who are taking advantage of the weak yen, materials and labor supply constraints remain the main headwind for construction and real estate firms.
The September Tankan diffusion index for large manufacturers is forecast by economists to rev up to 25 (the highest since 25 in December 2017) after surging to an eight-year high of 22 in June from 17 in March. The index for small manufacturers is expected to continue rising to 11 from 9 in June and 7 in March for a fourth straight increase.
The index for large non-manufacturers is forecast to slip back to a still solid 36 after edging up to 37 in June from 36 three months earlier (those two are the highest since 41 in September 1991). Sentiment among small non-manufacturers is seen edging back down to 14 from 15 in June and 16 in March.
Despite lingering geopolitical risks, many industries have revised up their plans to invest in factories and offices amid widespread labor shortages and strong needs to build artificial intelligence data centers.
Large firms are expected to revise up their combined capital investment plans for fiscal 2026 that began in April to a 12.1% increase over fiscal 2025 from a 11.5% gain they planned in June. Smaller firms are also seen revising up their investment plans to a 4.8% drop from an 8.3% fall.
Thursday, Oct. 1
0850 JST (2350 GMT/1950 EDT Wednesday, Sept. 30) The Bank of Japan releases the summary of opinions from the Sept. 17-18 meeting. Governor Kazuo Ueda told a news conference on Sept. 18 that the phase of the bank’s policymaking had shifted from its short-term aim of lifting underlying inflation from years of deflation to anchor inflation around 2% and by keeping inflation from deviating upward from the bank’s 2% price stability target.
Asked further about whether the BOJ may need to conduct a large-size or back-to-back rate hike, Ueda replied that those actions are usually taken when there is a risk of inflation rising fast beyond target or it is already above target, as seen in Europe and the United States in 2022 and 2023. “We are making various pre-emptive adjustments now so that as a result, we can reduce the possibility of being forced to raise rates rapidly that would create unexpected circumstances for the economy and markets,” he said.
The nine-member board decided to raise the target for the overnight interest rate to 1.25% from 1% in a 7 to 2 vote, warning that elevated energy prices caused by the Iran war could spread to a wide range of goods and services and push up underlying inflation above the bank’s 2% price stability target. The bank’s sixth rate hike in the current cycle at this timing was widely expected and follows no change in July and a 25-basis point (0.25 percentage point) rise in June.
The board repeated that it will “continue to raise the policy interest rate and adjust the degree of monetary accommodation” in response to developments in growth and inflation. Underlying inflation is nearing the bank’s 2% price stability target and financial conditions are accommodative, it noted. The BOJ has been lifting the policy rate gradually toward a more neutral level estimated to be somewhere between 1.1% and 2.5%.
Friday, Oct. 2
0830 JST (2330 GMT/1930 EDT Thursday, Oct. 1) The Ministry of Internal Affairs and Communications releases September Tokyo CPI.
Mace News median: total CPI +2.2% y/y (range: +2.1% to +2.4%) vs. Aug +1.9%; core CPI (ex-fresh food) +2.1% (range: +1.9% to +2.2%) vs. Aug +1.8%; core-core CPI (ex-fresh food, energy) +2.4% (range: +2.1% to +2.6x.x%) vs. Aug +2.0%
Consumer inflation in Tokyo, a leading indicator of the national trend, is expected to continue accelerating in September as elevated energy, import and labor costs are forcing firms in many sectors to raise prices. The Mideast conflict lingers on while the yen remains under year-earlier levels, eroding Japa’s purchasing power.
All three key CPI measures are now seen just above the Bank of Japan’s 2% target. The upward pressure has been partly mitigated by nationwide fuel and utility subsidies. Residents in the Tokyo metropolitan are also benefit from city water subsides and free daycare services.
The core measure (excluding fresh food) is forecast to rise 2.1% on year after the annual rate accelerated to 1.8% in August from 1.7% in July and 1.5 % in June. The core rate hit a recent peak at 3.6% in May 2025 when processed food price hikes were sharp in the aftermath of domestic rice shortages.
The annual rate of the total CPI is seen rising to 2.2% after edging up to 1.9% in August from 1.8% in July and 1.6% in June. The year-on-year increase in the core-core CPI (excluding fresh food and energy), which is not directly impacted by fuel subsidies, is estimated at 2.4%, up sharply from 2.0% in August, 1.8% in July and 1.7% in June.
At its Sept. 17-18 meeting, the Bank of Japan’s nine-member board decided to raise the target for the overnight interest rate to 1.25% from 1% in a 7 to 2 vote, warning that elevated energy prices caused by the Iran war could spread to a wide range of goods and services and push up underlying inflation above the bank’s 2% price stability target. The bank’s sixth rate hike in the current cycle was widely expected and follows no change in July and a 25-basis point (0.25 percentage point) rise in June.
The board repeated that it will “continue to raise the policy interest rate and adjust the degree of monetary accommodation.” The timing and pace of future rate hikes, it said, depend on how its medium-term economic outlook is affected by three main risk factors: the impact of the Mideast conflict, strong global demand to develop artificial intelligence and fluctuations in foreign exchange rates.
Friday, Oct. 2
0830 JST (2330 GMT/1930 EDT Thursday, Oct. 1) The Ministry of Internal Affairs and Communications releases the August unemployment rate.
Mace News median: 2.4% (range: 2.4% to 2.5%) vs. 2.4% in July, 2.5% in June, 2.5% in May, 2.5% in April, 2.7% in March, 2.6% in February, 2.7% in January, 2.6% from August to December 2025, 2.4% in July 2025, which was a four-month low.
The seasonally adjusted unemployment rate in Japan is expected to remain low at 2.4% in August amid lingering labor shortages after falling to a 12-month low of 2.4% in July from 2.5% seen in the previous three months and 2.7% in March.
The national average unemployment remains well below the rates in other major economies. Labor shortages continue in the sectors with long work hours and lower pay, notably daycare, medical, transport and construction. Last year, unemployment was stuck at 2.6% from September to December after rising to the level in August from a five-month low of 2.4% in July.
Payrolls are expected to post a gain on the year after being flat in July and rising in the previous five months and marking a rare year-on-year drop in January. In July, there was a pullback in manufacturing after the sector posted a sharp gain in June and its first rise in many months in May. Personal services like laundry and hairdressing marked a large increase in July. Learning support and medical/welfare services continued to hire more than year-earlier levels.
In recent months, employment gains have been in both regular and non-regular positions (sharp gains in women and non-regular jobs) after the total number of employed unexpectedly posted its first year-on-year drop in 42 months in January for one-off factors.
The government continues to describe employment conditions as “showing signs of improvement” in its latest monthly economic report for August, unchanged since the last upgrade for the category in June 2023.