As the economy rebounds, Japanese manufacturers experience a boost in mood.

Confidence in business sentiment among Japan’s major businesses has improved significantly, according to the Reuters Tankan poll. The survey shows that manufacturing has turned positive for the first time this year, while the service sector has reached a five-month high. This positive news suggests that Japan’s economy continues to improve after the effects of the coronavirus pandemic. However, uncertainty in the global economy means that Governor Kazuo Ueda of the Bank of Japan is taking a cautious approach to monetary policy normalisation. Ueda has stated that inflation needs to reach a sustainable 2% before the bank considers an exit strategy.

Despite rising consumer confidence due to the easing of lockdown restrictions, businesses are still impacted by high global inflation. Companies are reporting higher costs for raw materials and services, which is affecting consumption. However, supply chain bottlenecks have eased, and oil refiners and automakers are reporting positive reactions. The sentiment index for major manufacturers reached +6 in May, which is the first positive figure of the year. The services sector index rose slightly from April to a year-high of 25, led by retailers, real estate, and construction companies.

The optimism in the business community is an indication of hopes for domestic demand-led growth, which is vital for Japan’s economy. The Bank of Japan Tankan in April showed that manufacturing sentiment had its worst deterioration in over two years, which reinforces the need for a cautiously optimistic approach to monetary policy. The sentiment survey index calculates the ratio of optimistic to pessimistic respondents. A positive number means that optimists outnumber pessimists.

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