July 2 (Bloomberg) -- Confidence among Japan's largest manufacturers held near a two-year high and companies said they're increasing spending, supporting the central bank's argument for raising interest rates.
The Tankan, Japan's most closely watched business survey, showed sentiment was unchanged at 23 points in June from March and near December's two-year high of 25, the Bank of Japan said in Tokyo today. The result matched the median estimate of 26 economists surveyed by Bloomberg News. A positive number means optimists outnumber pessimists.
Sentiment among service companies held at a 15-year high of 22 points for a third quarter as the export-led expansion created jobs and spurred consumer spending. The report supports expectations the bank will raise its key 0.5 percent overnight rate, the lowest among major economies, as soon as August.
``The survey confirms the healthy sentiment of large companies and solid prospects for the economy,'' said Takehiro Sato, chief economist for Japan at Morgan Stanley in Tokyo. Sato last month brought forward his rate-increase forecast to August.
The yen traded at 122.68 per dollar at 4:42 p.m. in Tokyo compared with 123.09 before the report. The yield on Japan's benchmark 10-year bond rose 2 basis points to 1.885 percent. The Nikkei 225 Stock Average rose 7.94 points to 18,146.30.
The Tankan, which means short-term economic outlook in Japanese, surveyed 10,839 companies from May 28 to June 29, asking them about sales, profit, spending, hiring and confidence.
Rate Increase
Eleven of 17 economists surveyed by Bloomberg last month said the bank will act in August after the government publishes economic growth figures for the second quarter. Others say falling prices and weak production mean Governor Toshihiko Fukui will refrain from proposing a rate increase next month.
Chief government spokesman Yasuhisa Shiozaki said the Tankan shows the economy is recovering steadily. Monetary policy is up to the Bank of Japan, he added.
Large companies said they'd increase capital spending by 7.7 percent in the year ending March 31, less than the 9 percent estimated by economists, though more than the 2.9 percent planned three months ago. Companies boosted investment by 10 percent in 2006, the fastest pace in 16 years.
Prospects for exporters are improving. Concern that the U.S. will lapse into recession has eased and the yen's slide of 4.3 percent against the dollar and 5.7 percent per euro in the past three months bolstered earnings at companies including Canon Inc.
Canon's Profit
Canon, the world's largest maker of digital cameras, posted record earnings in the first quarter, thanks in part to the yen's drop, which accounted for 9 percent of operating profit. Digital camera exports surged 32.6 percent in May, the Tokyo- based Camera & Imaging Products Association said today.
Large manufacturers see the yen trading at an average of 114.4 per dollar for the fiscal year, the Tankan showed. That's little changed from the 114.32 predicted three months ago, even after the currency's decline in the quarter.
Capital spending by large manufacturers is expected to climb 11.2 percent this fiscal year, faster than the 2.5 percent forecast in March, the central bank said.
``Our volume of production is getting better and better,'' said Toshio Maruyama, president of Advantest Corp., the world's biggest maker of memory-chip testers. He cited demand from makers of chips for Apple Inc.'s iPhone and flat-panel televisions ahead of next year's Beijing Olympics.
Labor Shortages
Companies said they were still seeing labor shortages. An index of labor demand among large manufacturers was minus 6 in June, close to March's 15-year high of minus 7. A negative number indicates more companies are short of manpower.
Japan's jobless rate held at 3.8 percent in May, a nine- year low, helping spending by households climb for a fifth month, the longest streak of monthly gains since 2004.
Higher demand at home is encouraging service providers, whose spending has lagged behind manufacturers since 1991, to expand stores and add capacity. Consumer spending and exports drove the economy's 3.3 percent annualized first-quarter growth.
``The good business environment for the manufacturing sector is spreading to the non-manufacturers,'' said Masayuki Kichikawa, a senior economist and currency analyst at Mitsubishi UFJ Securities in Tokyo. The survey result is ``somewhat'' supportive of a rate increase in August, he said.
Takashimaya Co., Japan's largest retailer, plans to spend 26.9 billion yen this year on revamping its stores.
``Service companies are expecting demand to gather momentum and that's prompting them to invest,'' said Naoki Iizuka, an economist at Mizuho Securities Co. in Tokyo.
Price Trends
Some economists say the bank may wait until after August to raise interest rates. Industrial production unexpectedly fell for a third month in May and consumer prices excluding fresh food declined 0.1 percent, a fourth monthly drop. Wages fell for a sixth month, the Labor Ministry said today.
``Given that production and consumer prices reports were weak, we may see the bank wait until after August,'' said Junko Nishioka, an economist at ABN Amro Securities Japan Ltd. ``We're not seeing the recovery spreading to small and medium-sized companies.''
Smaller companies are having a harder time passing on costs amid consumer-price declines, said Yasunari Ueno, chief market economist at Mizuho Securities Co. Sentiment among small manufacturers and service providers both deteriorated, falling to 6 points and minus 7 points respectively. The companies also said they plan to cut spending.
To contact the reporter on this story: Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net
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