The sentiment among Japan’s major manufacturers improved modestly in the three months leading up to December, according to a quarterly survey released on Friday. This trend supports the central bank’s strategy to gradually raise interest rates from near-zero levels.
Non-manufacturing sectors also maintained a positive outlook on business conditions. However, rising costs for raw materials and labor dampened confidence among retailers, the survey revealed.
The report, released ahead of the Bank of Japan’s two-day policy meeting next week, underscores how a worsening labor shortage is posing challenges for companies and potentially limiting economic growth.
According to the BOJ’s “Tankan” survey, businesses anticipate a decline in conditions over the next three months due to sluggish global demand and uncertainties linked to potential higher tariffs from U.S. President-elect Donald Trump.
The headline index for large manufacturers’ business confidence rose to +14 in December, up from +13 in the previous quarter, marking the highest level since March 2022. This exceeded the median market forecast of +12.
The improvement was largely attributed to a recovery in auto production and strong demand for equipment, as businesses increased capital spending, a BOJ official noted during a briefing.
“Despite challenges from China’s economic slowdown, companies appear to be holding steady. This is a positive sign for the BOJ, indicating progress for both the economy and inflation,” said Saisuke Sakai, chief economist at Mizuho Research & Technologies.
Meanwhile, an index measuring sentiment among large non-manufacturers dipped slightly to +33 from +34 in September, aligning closely with the median market expectation of +32.The business sentiment among retailers, hotels, and restaurants deteriorated significantly as they grappled with labor shortages and rising costs for labor and raw materials, the survey revealed.
“Demand from inbound tourism remains robust but may be reaching its peak, while households appear to be adopting more frugal spending habits,” noted Kazutaka Maeda, an economist at Meiji Yasuda Research Institute.
Large companies plan to boost capital expenditure by 11.3% in the fiscal year ending in March, surpassing the 10.6% increase forecast in the September survey and exceeding market expectations for a 9.6% rise.
Sentiment among small non-manufacturers improved to its highest level since 1991, driven by the ability to pass on rising costs, which lifted profits. This indicates Japan is experiencing sustained price increases—a key condition set by the Bank of Japan (BOJ) for further rate hikes.
The survey also showed that companies expect inflation to remain above the BOJ’s 2% target over the next one, three, and five years, signaling that the groundwork for higher interest rates in Japan is taking shape.
However, businesses foresee a deterioration in conditions over the next three months due to persistently high costs, slowing global growth, and uncertainties surrounding U.S. President-elect Donald Trump’s policies.
“The outlook remains highly uncertain, partly due to Trump’s potential tariff policies, which could impact automakers’ profits,” said Saisuke Sakai, chief economist at Mizuho Research & Technologies.
“Non-manufacturers are also cautious, feeling the strain of labor shortages, while weak consumption prospects add to their concerns amid ongoing price increases,” he added.
The BOJ ended its negative interest rate policy in March and raised its short-term policy rate to 0.25% in July, reflecting progress toward its 2% inflation target.
BOJ Governor Kazuo Ueda has stated that the central bank will continue raising interest rates if companies persist in increasing prices and wages, driven by optimism about the economic outlook, to maintain inflation sustainably around its 2% target.
According to sources cited by Reuters, the BOJ is inclined to keep interest rates unchanged in its upcoming meeting as policymakers want more time to assess overseas risks, though no consensus has been reached on the final decision.
The Tankan survey’s sentiment diffusion indexes are calculated by subtracting the percentage of respondents who view conditions as poor from those who see them as good. A positive value indicates that optimists outnumber pessimists.
