Futu Securities has learned that Japanese large manufacturers' confidence has risen compared to three months ago, which has opened the door for the Bank of Japan to consider raising interest rates later this month. The Tankan index of large manufacturers' business conditions for the second quarter, released by the Bank of Japan on Monday, showed that the reading for June climbed from 11 in March to 13, and economists had previously predicted the index would remain unchanged. The index of business conditions of large non-manufacturers declined from 34, the highest level since 1991, to 33.

Prior to the Bank of Japan's policy meeting at the end of this month, the Tankan report is one of the important data releases. Among the economists surveyed by Bloomberg, one in three expects the Bank of Japan to raise interest rates at the meeting. Due to Bank of Japan Governor Haruhiko Kuroda's promise to closely monitor the impact of the yen on inflation, the yen exchange rate fell to its lowest level since 1986 last week, prompting some analysts to believe that the probability of the Bank of Japan raising interest rates will increase.

Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities, said: "Thanks to strong business conditions and high inflation expectations, the Tankan data helps to maintain the possibility of a rate hike in July."

Monday's Tankan data reflected the resilience of most industries, including capital expenditure plans for this fiscal year raised to grow by 11.1%. Among them, the textile index rose from 11 to 22, leading the manufacturing sector, while industrial machinery manufacturers also posted solid gains. The automotive industry slipped slightly after a new safety certification scandal emerged.

Maruyama said: "The new scandal in the auto industry is likely to have been priced in, so although the market sentiment towards the auto industry has deteriorated slightly, this suggests that the new scandal is not expected to be as serious as the previous scandal."

In the service industry, the communications industry led the gains, while the retail industry fell from 31st to 19th, indicating that consumer spending is weakening in the face of inflation.

Data show that inflation expectations, which are the main drivers of price growth, have risen slightly in the long term. Although the one-year overall price growth forecast remains at 2.4%, the three-year forecast has been raised to 2.3% and the five-year annual growth rate outlook has been raised to 2.2%.

Bloomberg economist Taro Kimura said: "The signals from the Bank of Japan's Tankan survey support another rate hike, and we expect the Bank of Japan to raise interest rates at its July meeting. Indicators related to inflation show that more companies are planning to raise prices and believe that the increase in consumer prices will remain above the 2% target in the long term."

Respondents to the survey lowered their forecast for the yen's fiscal year, with the average exchange rate for the yen now at 144.77 to the dollar. On Monday morning, the yen traded at around 160.80 in Tokyo, after falling to 161.27 over the weekend, the weakest since 1986.

The impact of the weak yen on Japan's domestic mood is mixed. The lower yen has helped exporters achieve record high profits, attracted record numbers of foreign visitors, and benefited regional economies and retailers. At the same time, small businesses and households have been forced to cope with rising costs of imported raw materials, fuel and food. More and more corporate executives have mentioned this downside.

Although slightly down, the atmosphere in the service industry remains strong. According to data from the Japan National Tourism Administration, the number of foreign visitors in May reached a record high, up 60% year-on-year, benefiting everything from dining to hotels.

However, there are still reasons to be cautious. The Japanese government on Monday significantly cut its first-quarter gross domestic product, saying that after the construction data was revised, the annualized contraction rate increased from the previous 1.8% to 2.9%.

Maruyama said: "The mixed data puts the Bank of Japan in a dilemma when deciding on interest rates." As for the Tankan data, Toru Suehiro, an economist at Daiwa Securities, emphasized the sharp decline in the retail industry and pointed out that inflation is beginning to drag on consumption.

Suehiro said: "The results show that for service companies that deal directly with customers, suppressed demand after the epidemic and the rise in demand driven by inbound tourism have peaked."