Japanese corporate sentiment reached its highest level in four years during the December quarter, according to the Bank of Japan’s closely monitored Tankan survey released Monday. The report revealed major manufacturers’ business confidence index climbed to +15, marking the third consecutive quarter of improvement and matching market forecasts.
The survey’s findings reinforce widespread market anticipation that the central bank will proceed with interest rate increases this week. Large corporations projected substantial capital expenditure growth of 12.6% for the fiscal year ending March 2026, exceeding median market expectations of a 12% increase.
Despite current optimism, companies expressed caution about the coming quarter, anticipating worsening business conditions due to concerns about higher U.S. tariffs and softening consumer spending. The non-manufacturers’ sentiment index remained robust at +34, nearly aligning with market projections of +35.
Labor market conditions emerged as particularly significant, with companies reporting the tightest job market since 1991’s asset bubble era. This severe labor shortage, while potentially constraining growth in Japan’s aging economy, supports sustained wage growth—a critical factor for the BOJ’s rate hike considerations.
Inflation expectations remained anchored around the central bank’s 2% target, with companies projecting 2.4% inflation across one, three, and five-year horizons. Separate BOJ research indicated regional branches expect 2026 wage increases to mirror those of 2025, supporting the bank’s assessment of continued price-wage momentum.
Although Japan’s economy contracted in the third quarter due to export declines from U.S. tariffs, analysts anticipate recovery in the current quarter as exports and manufacturing output show signs of rebound. With inflation consistently above the 2% target for over three years, BOJ officials increasingly signal readiness to normalize monetary policy to avoid falling behind the curve on inflation management.