Big Japanese manufacturers’ business sentiment reached a four-year high in the three months ending December, according to a closely monitored survey. This boost in confidence reinforces market expectations that the Bank of Japan (BOJ) will raise interest rates this week. Despite current optimism, firms are concerned that conditions will worsen in the coming quarter due to the impact of higher U.S. tariffs and sluggish consumer spending. This reflects ongoing uncertainty about how much the BOJ might eventually increase borrowing costs.
The BOJ’s “tankan” survey showed the headline index for large manufacturers’ confidence rose to +15 in December from +14 in September, aligning with market forecasts and marking the third consecutive quarter of improvement, the highest since December 2021. This suggests companies are temporarily managing the effects of increased U.S. tariffs. Similarly, sentiment among non-manufacturers remained steady at +34, consistent with expectations.
Senior economist Masato Koike of Sompo Institute Plus said the tankan reinforces the prevailing view that the BOJ will raise rates in December unless a major shock occurs. Firms project a 12.6% increase in capital expenditure for the fiscal year ending March 2026, slightly above the median market forecast of 12%. Sources indicate that the BOJ is likely to raise its short-term policy rate to 0.75% from 0.5% at its December meeting, as fears of severe damage from tariffs diminish.
The survey also showed rising prices in the fourth quarter, with expectations of continued increases, signalling solid demand and companies passing higher costs on to consumers. However, outlooks for business conditions in the next three months remain cautious, as companies cite labour shortages and higher prices affecting consumption.
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The tankan also revealed that firms perceive job market conditions as their tightest since 1991, potentially limiting growth but supporting wage gains. Analysts believe this labour market tightness will foster wage-price dynamics favourable to continued rate hikes. Japan’s economy contracted in the third quarter amid export declines but is expected to rebound. The survey suggests inflation expectations are anchored around the 2% target, with companies forecasting 2.4% inflation over the next one to five years.
