Confidence among a wide range of Japanese companies picked up in the fourth quarter, sending a positive signal to the Bank of Japan ahead of next week’s policy decision.

An index of sentiment among the country’s biggest manufacturers rose to 12 in December from 9 three months earlier, the third straight gain, according to the BOJ’s quarterly tankan report released Wednesday. The reading beat economists’ forecast of 10.

The business mood among the largest nonmanufacturers also improved from 27 to 30, exceeding economists’ expectations and setting a fresh 32-year high. A positive figure means optimists outnumber pessimists.

The data showed sentiment picking up across the board, with an index for small manufacturers rising to 1, turning positive for the first time since early 2019. The gauge for small nonmanufacturers advanced to 14, beating estimates.

The evidence of robust corporate sentiment will come as a welcome sign for the BOJ, as it boosts the likelihood that companies can continue to conduct the large wage hikes the central bank hopes might feed into a positive wage-price cycle that would pave the way for normalizing monetary policy.

"Today’s results overall show that the economy isn’t going to fall apart,” said Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research and Consulting. "This tankan is supportive for the BOJ to move toward normalization, and I continue to expect the step in April after the bank confirms the results of spring wage negotiations.”

The tankan survey showed that companies are generally maintaining their capital investment plans, with large firms across all industries saying they intend to increase such investment by 13.5% in the current fiscal year, largely unchanged from their view three months ago.

"The capital spending plans are also solid,” Kobayashi said. "There have been some companies that have become hesitant due to high material costs, but the tankan shows they haven’t given up and will go ahead to invest.”

The data add to signs that the economy will likely return to growth in the current quarter after a deep dip in the previous period. Gross domestic product (GDP) contracted at an annualized pace of 2.9% in the three months through September as households reined in spending, according to revised figures released last week.

"Surprisingly upbeat results in the Bank of Japan’s tankan survey of business sentiment suggest output and investment may help buoy Japan’s fourth-quarter GDP, although slower global growth should weigh on exports,” said Taro Kimura, economist at Bloomberg Economics.

While the figures were broadly positive, they also underscored a continuing gap between various pockets of corporate Japan, with large firms generally more upbeat than their smaller counterparts and nonmanufacturers especially optimistic as the weak yen spurs inbound tourism, bolstering a wide swath of the services sector.

The survey reflected mixed conditions in various industries. The easing chip shortage smoothed operations at automakers, lifting sentiment for that group to 28 from 15 in the prior period. Solid demand for semiconductors boosted the gauge for large electrical machinery makers to 4 from minus 2 previously.

Medium-sized ceramics, stone and clay companies remained among the most bearish sectors, with small textile firms also negative.

In nonmanufacturing, the reading for large firms in accommodations, eating and drinking services soared to 51, helped in part by strong demand associated with surging inbound tourism. The weak yen is a factor that helped boost the number of foreign visitors to about 2.52 million in October, surpassing the level of two years ago.

Wednesday’s survey showed that all companies on average forecast the yen to trade at ¥139.35 against the dollar in the current fiscal year, compared with an estimated ¥135.75 three months ago.

In recent weeks market participants have increasingly seen the BOJ inching toward normalization. While a Bloomberg survey of economists earlier this month found that most expected no tweaks to policy when the board meeting ends on Dec. 19, two-thirds forecast that authorities would scrap the negative rate by the end of April. Half said the move would happen that month.

Market chatter was fueled last week when Gov. Kazuo Ueda said his job would become more challenging from the year’s end, and one of his deputies played down the potential impact that would result from a rate hike. Still, officials see little need to rush, as they have yet to see enough evidence of wage growth that would sustain inflation, according to people familiar with the matter.