Reuters, Tokyo A government survey released on Tuesday revealed that although confidence in Japan's service sector improved in December, businesses anticipate a deteriorating future, indicating that growing living expenses were having an impact on household spending.

Separate data revealed that rising raw material costs and a worsening labor shortage contributed to a decade-high number of company bankruptcy cases last year, underscoring the impact of growing inflation on Japan's corporate sector.

Many observers anticipate that the Bank of Japan will increase interest rates from the current 0.25% during its two-day policy meeting, which ends on January 24.

As Japan's wage outlook continues to improve, BOJ Deputy Governor Ryozo Himino announced on Tuesday that the central bank will discuss whether to hike interest rates next week.

He stated during a news briefing that "the likelihood of Japan's economy moving in line with our projection is heightening gradually."

According to the government's "economy watchers" poll, an index that gauges confidence among service-sector businesses, such as restaurants and taxi drivers, was 49.9 in December, up 0.5 points from the previous month in a second consecutive month of gains.

However, as rising fuel and food costs put pressure on consumption, a measure of businesses' optimism about the economy dropped 0.6 points to 48.8, according to the survey.

Because the questioned enterprises are near to consumers, the "economy watchers" survey is closely watched by markets as a leading predictor of household spending and the overall economy.

According to a different poll conducted by the private think tank Teikoku Databank and published on Tuesday, the number of business bankruptcy cases in 2024 reached 9,901, the highest number since 2014 and up 16.5% from the year before.

With consumption up a weak 0.7%, Japan's GDP grew by 1.2% annually in the three months ending in September, dropping from the 2.2% growth in the previous quarter.

Due in part to growing import costs brought on by a weakening yen, core inflation has been above the BOJ's 2% target for almost three years.

Policymakers hope that workers' regular pay, which recently has been rising at an annual pace of 2.5% to 3%, keeps increasing and supports consumption. While rising wages would underpin consumption, they would squeeze smaller firms that are unable to earn enough profits to retain workers via pay hikes.