Business conditions in Japan showed a modest lift in sentiment even as the Iran war heightened worries for growth and energy supplies, according to the latest Bank of Japan “tankan” survey. In the March reading released Wednesday, the key diffusion index for major manufacturers rose to 17 from 16, extending a streak in which the measure improved for four consecutive quarters.
The survey tracks how many companies expect favorable conditions compared with those that feel pessimistic. In this round, the increase in manufacturers’ sentiment stood alongside rising company concerns about Japan’s economic growth prospects and oil supplies, framed in the report as related to the war in Iran.
The tankan’s broad snapshot also showed that sentiment gains were not universal across Japan’s economy. The index for large non-manufacturers—covering parts of the service sector—remained unchanged at 36 from the previous survey.
The report said Japan’s inflation has so far remained relatively moderate, but it pointed to growing anxiety about prices for gasoline and other consumer goods. It described uncertainty affecting both investors and households, including how long the conflict may last and what U.S. President Donald Trump might do next.
Market volatility added to the backdrop: the report said Japan’s benchmark Nikkei 225 has gyrated sharply in recent weeks. Against that uncertainty, analysts cited in the report said the Bank of Japan could begin raising interest rates amid concerns about inflation, particularly given rising energy costs and a weaker yen that feed into household living costs.
The yen’s role in Japan’s outlook has been complicated, the report noted. Historically, a weaker yen has boosted exports by increasing the value of overseas earnings when converted back into yen, benefiting large manufacturers such as automakers and electronics firms.
But the report also said a weak yen has turned into a headwind in recent years for a resource-poor economy that imports much of its energy and other key inputs such as food and manufacturing components. It also said the U.S. dollar has been rising against the yen lately, a development tied to currency conditions that can influence imported prices.
Japan’s central bank has been normalizing policy after years of a negative interest rate framework used to fight deflation. The report said the Bank of Japan kept its interest rate at 0.75% in March, and that the next monetary policy board meeting is set for April 27 and 28.
The tankan’s mix of improved manufacturing sentiment and persistent caution underscores a central question facing Japanese policymakers and companies as the Iran war continues to influence energy markets. For investors and businesses watching the BoJ, the next decisions will likely hinge on whether inflation pressures tied to energy and currency pressures intensify.
The FRED series values in this article’s package reflect the macro indicators available at the publication vintage: the trade-weighted U.S. dollar index broad measure (DTWEXBGS) was 120.8851 and the Fed’s preferred inflation gauge (PCE Price Index, PCEPI) was 2.832151941124403.