By Makiko Yamazaki and Leika Kihara
TOKYO, Oct 1 (Reuters) - Japanese manufacturers' confidence hit an eight-year high over July-September but non-manufacturers' mood soured, a central bank survey showed, painting a mixed picture of the economy that may soften the chance of a back-to-back rate hike this month.
Corporate inflation expectations remained elevated but did not accelerate from three months earlier, the "tankan" survey showed on Thursday, taking some pressure off the Bank of Japan to follow
a hike in September with another in October.
"While manufacturers' sentiment improved due to strong global AI demand and receding supply constraints, lacklustre consumption for durable goods may have put the brakes on sentiment," said economist Takeshi Minami at Norinchukin Research Institute.
"Today's tankan adds the case for further rate hikes ... but doesn't offer enough for a consecutive rate increase," he said.
The survey is widely seen as key input for the BOJ when determining how soon it will raise its policy interest rate, after having hiked to a 31-year high of 1.25% last month to counter price pressure from an energy shock and weak yen.
The headline index measuring big manufacturers' business sentiment reached +24 in September from +22 in June, the highest since March 2018, the survey showed. That compared to the +25 average analyst estimate.
Many manufacturers benefited from robust chip and AI-related demand, as well as improving profit margins as they passed on rising raw material costs, a BOJ official told a briefing.
By contrast, big non-manufacturers' sentiment slid to +35 from +37 in June, the first decline in five quarters and short of a median market forecast of +36.
Service-sector firms saw rising raw material and labour costs hit profit, and suffered falling sales as consumers shunned price hikes, the official said. Typhoons and long periods of rain also affected restaurants and hotels, he said.
Both manufacturers and non-manufacturers expect business conditions to worsen three months ahead, a sign that uncertainty brought by the Middle East war was weighing on sentiment.
NO RUSH TO RAISE?
The BOJ raised its policy interest rate to a 31-year high last month and signalled readiness to hike further to prevent inflation from overshooting its target, heightening the prospect of further hikes.
While many analysts had expected the BOJ to raise the rate again in October or December, the yen fell against the U.S. dollar on Thursday on receding bets of October action.
BOJ Governor Kazuo Ueda has highlighted elevated inflation expectations as among key factors convincing him that underlying inflation was nearing the bank's 2% target - drawing attention to the tankan's outcome on corporate inflation expectations.
The survey showed companies forecast inflation at 2.6% within three years and 2.5% in five, signalling expectations of inflation beyond the BOJ's 2% target for a prolonged period.
That forecast for three years ahead is flat versus three months earlier and that for five is slightly lower, offering little sign that inflation expectations were firing up in a way that warranted immediate rate hikes.
Indices in the tankan also showed firms seeing slightly softer increases in input costs.
Still, the indices on corporate funding conditions remained largely unchanged from three months earlier, indicating the financial environment remains loose despite past rate hikes.
"Any sign of worsening corporate funding conditions could have deterred further rate hikes. Today's data showed Japan can avoid such a situation," said senior economist Masato Koike at Sompo Institute Plus.
The survey was conducted from August 26 through September 30 with roughly 70% of firms responding by September 9, before the BOJ raised its policy rate on September 18.
(Reporting by Makiko Yamazaki and Leika Kihara; Editing by Jacqueline Wong and Christopher Cushing)
