Photo/Illutration Customers line up for shaved ice at a shop in Tokyo’s Asakusa district in June. The operator says prices of ingredients, including fruits, nuts and milk, have risen nearly 30 percent over the past few years. (Ken Miyazaki)

Business confidence among large nonmanufacturers dipped for the first time since June 2020, reflecting rising prices of raw materials due to the weak yen and surging labor costs, a Bank of Japan survey showed.

The diffusion index for those companies fell 1 point to plus 33, according to the quarterly “tankan” business confidence survey for June released on July 1.

The index is calculated by subtracting the percentage of respondents that said business conditions are bad from the percentage of respondents that said business conditions are good.

A positive reading means that optimists outnumber pessimists.

A post-pandemic recovery in consumption and demand from foreign travelers had brightened business sentiment among large nonmanufacturers, such as retailers, hotels and restaurants.

The diffusion index still remains fairly high, similar to the level in late 1991 after the late 1980s asset-inflated economic boom.

However, the first decline in 16 quarters indicates that higher prices stemming from the yen’s sharp depreciation are now weighing heavily on the companies.

By industry sector, retailers posted the largest decline, falling 12 points to plus 19 from the previous survey for March.

BOJ officials said consumers became more budget-minded and bought fewer items due to higher prices.

The index for the accommodation and food service sector, which was additionally affected by rising labor costs, shed 3 points to plus 49.

The diffusion index for large manufacturers rose 2 points to plus 13 for the first increase in two quarters.

BOJ officials said materials suppliers, such as pulp and paper makers, managed to raise their product prices, and that the yen’s weakness likely benefited some exporters.

The automotive sector logged a 1-point decline to plus 12 apparently due to a testing scandal that surfaced in June involving Toyota Motor Corp. and four other companies, in addition to higher prices for materials.

A total of 9,076 companies responded to the survey between May 29 and June 28.

The BOJ, which will hold its next monetary policy meeting at the end of July, has said it will consider raising interest rates if an inflation rate of 2 percent, accompanied by wage increases, comes into sight.

The tankan survey for June showed that companies are expecting a 2.3-percent inflation rate three years ahead and 2.2 percent five years down the road, up slightly from their projections in the previous survey.

It also showed that companies remain bullish on investing in plant and equipment.

Tsuyoshi Ueno, senior economist at NLI Research Institute, said the latest tankan survey, taken as a whole, provides a boost to the central bank’s plan to raise interest rates.

“But there are causes for concern, such as the weak outlook for nonmanufacturers,” Ueno said.

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