The flash estimates for the Japanese purchasing managers' indices were somewhat weaker this morning than in the previous month. However, at 51.5, the composite PMI remained in expansionary territory. Yesterday's Tankan survey sent a clearer signal for a key interest rate hike at the end of this week, when the Bank of Japan meets for its last monetary policy meeting of the year, Commerzbank's FX analyst Volkmar Baur notes.

Inflation signals turn less benign

"This survey, which is conducted once a quarter by the Bank of Japan itself, is considered a reliable indicator of the Japanese economy. Here, the economic situation for all companies rose to 17 balance points, the highest level since 2018. To find an even higher value, one has to go back to the 1990s. The mood among medium-sized companies in particular has brightened significantly over the last three months, but large and small companies also currently assess the current situation as better than it has been for years."

"At the same time, the Tankan survey also sent a small warning to the monetary authorities. This is because the disinflationary trends seen in recent quarters in the form of falling output prices have slowed significantly in the last three months. Although the level is not alarming and points to inflation of around 2% at the current level, food prices are still significantly higher, so a small buffer for industrial goods and services would certainly not be a bad thing."

"The Tankan therefore points in the direction we have been expecting for some time: an interest rate hike at the end of this week. However, the market has already almost fully priced this in. For USD/JPY, it will once again depend on the tone of Governor Ueda. I expect him to be cautiously optimistic about further interest rate hikes. This should support the JPY."