Japan's shaky business mood adds to rate hike dilemma

STORY: The mood at Japanese firms is turning sour, and that poses a deepening dilemma for the country’s central bank.

Monday’s closely watched Tankan survey showed sentiment at big non-manufacturers falling to +33 in June.

That was down on a month before, and the first drop in two years.

The figures show service-sector firms expect things to get worse in the future, with increasing costs squeezing their profit margins.

Rising labor costs from a tight jobs market are adding to the pain of expensive imports.

There was at least a brighter picture for manufacturers.

Sentiment in the sector rose to +13, beating forecasts.

It reflected a rebound in auto industry output, and makers’ success in passing on higher prices to customers.

However, other data added to the gloom.

Revised numbers showed Japan’s GDP shrinking at an annual rate of 2.9% over January-March.

That was far worse than the 1.8% initially estimated.

The mixed data may not help the Bank of Japan to make its next decision on rates.

While the negative numbers might argue against another increase, the prospect of persistent price rises could push the other way.

Japanese stocks fell back from early gains after the Tankan, with traders betting the inflation outlook could tip the balance towards rate hikes.