TOKYO -- Business sentiment among Japan's large manufacturers has improved to the highest level since 2018, the Bank of Japan's latest Tankan survey showed on Thursday.
The improvement reflects strong external demand, as the U.S. and Chinese economies continue to recover steadily, boosting demand for Japanese autos and machinery.
The headline diffusion index of sentiment among large manufacturers came to plus 14 in June, compared with plus 5 in March, marking a fourth straight quarter of improvement.
DI is derived by subtracting the percentage of companies that regard business conditions as poor from those that are optimistic. Large manufacturers' DI is closely tracked by analysts for a clue to the direction of the economy.
The latest Tankan survey, conducted over the past month or so, covers some 9,500 companies of various sizes and industries in Japan.
Economists had predicted the index to rise to plus 15, according to a poll conducted by QUICK, a Nikkei group company. The index has been on a rebound after falling to as low as minus 34 last year, the worst reading since the 2009 global financial crisis.
Looking ahead, large manufacturers' DI for the next three months is projected at plus 13.
For large nonmanufacturers, the DI for June came to plus 1, compared with minus 1 for March. Economists had predicted a reading of plus 3.
Nonmanufacturers' DI for the next three months is projected at plus 3.
While Japan is benefiting from healthy exports, the economy has faced challenges domestically. A fire at the nation's key semiconductor maker, Renesas Electronics, in March created severe chip shortages, forcing automakers and other manufacturers to reduce production. Normal production was restored on June 24, but since it takes more than a month to produce chips from a scratch, actual shipments are not expected to return to normal until the second half of July.
Meanwhile, Japan continues to grapple with the coronavirus pandemic, with a state of emergency imposed on Tokyo, Osaka and other major regions between April 25 and June 20, resulting in reduced economic activity in that period.
Domestic economic activity is expected to improve in the second half of the year, as the COVID vaccination campaign has made progress and semiconductor shortages are expected to ease, economists say.
But the BOJ does not take chances and maintains ultra-easy monetary policy to help businesses adjust to "a new normal" -- a rapid shift to digitization and clean energy.
In the last monetary policy meeting held June 17-18, the BOJ said it would extend its emergency programs to funnel funds to businesses by six months through the end of March, and that it would introduce a new program aimed at supporting investments in clean technology.