By Leika Kihara
TOKYO, July 1 (Reuters) - Japanese business mood climbed to an eight-year high and corporate inflation expectations rose to record levels, a quarterly survey showed, underlining the economy's resilience to the Middle East war and bolstering the case for more rate hikes.
The data will be among factors affecting the Bank of Japan's quarterly growth and inflation forecasts due next month, which will offer clues on how soon it could raise interest rates again after a hike to a 31-year high
of 1% in June.
The headline index measuring big manufacturers' business sentiment improved to +22 in June from +17 in March, the BOJ's "tankan" survey showed on Wednesday, beating market forecasts of +16 and marking the highest level since March 2018.
While rising costs and supply disruptions caused by the Iran war weighed on sentiment, the negative impact was offset by brisk demand for AI-related goods and chips, the data showed.
An index measuring big non-manufacturers' sentiment rose to +37 from +36 in March. It also topped market forecasts for +35 and hit the highest level since August 1991, on robust inbound tourism and progress firms made in passing on costs.
Companies expect inflation to hit 2.6% both three and five years from now, up 10 basis points from the March survey and breaking record highs, the tankan showed, a sign firms see inflation staying well above the BOJ's 2% target for a prolonged period.
"It's a strong outcome that dispels concern the Middle East war could lead to a downturn in Japan's economy," said Yoshiki Shinke, an economist at Dai-ichi Life Research Institute.
"What's also notable is that corporate inflation expectations are creeping up, suggesting mounting price pressures. All in all, the tankan builds the case for another rate hike by year-end, possibly in October," he said.
CLOUDS AHEAD
Big firms expect to increase capital expenditure by 11.5% in the current fiscal year ending in March 2027, compared with a median market forecast for a 10.5% gain, the survey showed.
Moderating the optimism, however, companies expect business conditions to worsen three months ahead as they brace for rising costs and potential supply constraints from the war, the survey showed.
The Middle East conflict has complicated the BOJ's policy path, stoking inflation through higher oil prices while squeezing an economy dependent on imported fuel.
While the peace deal between the U.S. and Iran eased market fears over global price pressures, wholesale inflation spiked to a three-year high of 6.3% in May in a sign companies were already passing on higher costs from the energy shock.
Most firms replied to the tankan before the U.S.-Iran peace deal on June 15, the BOJ official said.
The BOJ raised interest rates to a 31-year high in June in a landmark step in its policy normalisation, as the war-induced spike in fuel prices added to inflationary pressure from a tight job market and rising import costs from a weak yen.
BOJ officials have kept up their hawkish rhetoric since then, though political pressure could complicate the central bank's decision on the timing of the next rate hike. Most analysts polled by Reuters expect another rate hike in the fourth quarter.
(Reporting by Leika Kihara; Editing by Shri Navaratnam)
