TOKYO – The Bank of Japan (BOJ) has released its latest quarterly Tankan business sentiment survey, revealing that confidence among Japan’s largest manufacturing firms has extended its positive streak to five consecutive quarters, according to data published Wednesday.
The closely watched diffusion index, a key metric that calculates the gap between businesses reporting favorable operating conditions and those experiencing negative outlooks, climbed five points to 22, up from a reading of 17 in the previous quarter. Sentiment also ticked upward among large non-manufacturing businesses, which span service sector industries, with the sector’s index edging up one point to 37 from the prior quarter’s 36.
Despite the broad improvement in short-term sentiment, growing macroeconomic headwinds are casting uncertainty over Japan’s economic trajectory, with energy prices and currency weakness emerging as top concerns. Japan relies on imports for nearly 100% of its oil and natural gas supplies, and the yen has plummeted to near 40-year lows against the U.S. dollar, with the greenback trading at roughly 162 yen in Wednesday dealings. While a weak yen boosts the value of export earnings when converted back to yen – a major benefit for Japan’s world-leading export manufacturers – rising energy costs have started to offset this upside.
Inflationary pressures had already mounted amid spiking fuel prices driven by the Iran war, though crude costs have pulled back following the interim ceasefire deal reached between the U.S. and Iran to end the conflict.
In response to persistent price gains and yen weakness, the BOJ raised its benchmark interest rate to 1% last month, marking a three-decade high for the policy rate. The move represents the central bank’s latest step to normalize monetary policy after decades of holding interest rates at or near zero to combat persistent deflation.
Market analysts note that while near-term economic indicators including corporate investment remain solid, Japan still faces deep long-term structural challenges, most notably a persistent and growing labor shortage driven by the country’s aging and shrinking population.
Naomi Fink, chief global strategist and chief economist at Amova Asset Management, noted that the survey confirms a two-track trend across Japanese business. “Sales remain firm, especially for large enterprises, but profits are expected to weaken,” Fink explained. “Fixed investment plans are strong for large and mid-size firms but less so for small firms.”