Japanese manufacturers' confidence has climbed to its strongest level in more than five years, with booming demand for semiconductors lifting business sentiment across the country, according to the latest Reuters Tankan poll.

The manufacturers' sentiment index rose to plus-27 in November, up from plus-22 in October and its highest reading since August 2021. The monthly poll is closely watched as a leading indicator of the Bank of Japan's own quarterly Tankan survey, and the result points to a Japanese economy holding up well despite higher prices and borrowing costs.

The poll was conducted between 27 October and 6 November and drew responses from 214 of the 508 companies surveyed. The index is calculated by subtracting the share of firms reporting pessimistic conditions from those reporting optimistic ones, so a positive reading signals net optimism.

Chip demand leads the improvement

The improvement was led by the electronics sector, where sentiment jumped to plus-39 in November from plus-25 the month before. One manager at an electronics machinery company told Reuters that semiconductor demand, particularly for memory chips, was very strong.

Precision machinery, which includes makers of chip-related equipment, also improved, rising to plus-42 from plus-38. One manager in the sector said orders from both domestic and international customers remained robust, while another machinery firm said product shipments for the semiconductor market had reached an unprecedented level.

The gains were broad rather than confined to technology. Oil refining and ceramics rose to plus-25 from plus-14, while chemicals improved to plus-33 from plus-27.

Services hit an eight-year high

The mood among non-manufacturers was even stronger. The index for service-sector firms surged to plus-35 in November from plus-23, a level not seen since June 2018.

Sentiment in information and communications rose to plus-29 from plus-8 on the back of strong orders, while services and others more than doubled to plus-43 from plus-19. One manager pointed to persistently tight labour market conditions, which are keeping demand for staff high.

Costs and rates still weigh

Not everything in the survey was positive. Firms in both sectors said rising prices and higher interest rates were weighing on business, and some reported difficulty passing increased costs on to their customers.

Looking three months ahead, manufacturers expect sentiment to edge up to plus-28 in February, while non-manufacturers see confidence easing slightly to plus-29, still well above recent levels.

For the Bank of Japan, the combination of strong business confidence, a tight labour market and persistent cost pressures will be one input as policymakers weigh the outlook for interest rates. Its own quarterly Tankan survey will provide the next major reading of corporate sentiment in Japan.